Successful mergers and acquisitions don’t happen by chance. As with most achievements in life, they’re the result of careful planning and execution.
Maybe you’re a booming business owner and dominant player in your industry who’s experienced years of organic growth. Or maybe you’re just starting to grow and have a vision for something bigger down the road. Either way, for one or a handful of reasons, you may want to acquire a competitor at some point.
Mergers and acquisitions (M&A) usually occur because one company wants to consolidate the market, enter a new market or acquire their competitor’s talent or intellectual property. Often, it’s some combination of all of those.
Regardless of the reason behind it, when one company acquires another, there are a slew of variables that determine the success of the newly created entity. It’s a complex process full of intricacies and nuances that can trip up even the most seasoned business owner.
You’re faced with an immense challenge: How do you take two disparate companies and combine them into a single, high-functioning profit machine?
Your first concerns are probably financial and technological in nature. Rounding out your list are likely things like compliance law, worker’s compensation, payroll administration and company culture.
And with good reason: You’d be remiss to gloss over any of these crucial aspects.
But the good news is, you don’t have to go it alone. A professional employer organization (PEO) can mitigate and manage your business’s HR-related risks, which can lead to a healthier, more prosperous acquisition.
Let’s face it, the key to your business success is your people. From the early stages of your company, to the M&A due diligence process and through the integration of the purchased firm, a PEO can simplify HR administration and smooth the often-turbulent acquisition process.
To best understand the value-add of a PEO throughout the M&A process, it’s easiest to look at the entire life cycle of a deal:
Stage 1: Getting your house in order
Long before you consider acquiring another business, you should take an introspective look at your company’s human resources strategy from both a transactional view and a more nuanced human perspective.
Human resources can be a burdensome, complex and expensive aspect to any business. It’s difficult to attract, train and retain talent. There may be compliance laws you didn’t realize you were breaking. For small- and medium-size businesses, worker’s compensation insurance costs can be exorbitant. And decent, yet affordable, medical and retirement benefits can be out of reach.
When you enter into a co-employment relationship, a PEO takes on many of your employer-related responsibilities such as payroll, benefits, tax remittance and related government filings. All the while, you continue to manage and grow your business.
Make no mistake about it: You remain in full control of your business, but you share the administrative burden and risk with the PEO. It’s the best of both worlds.
As a business owner, you can view your workforce as a bottom-line liability, doing only what’s essential to keep them working. Or you can see them as an asset and a key differentiator for success, taking care of them for long-term impact in the form of higher productivity, loyalty and eventually top-line growth.
Companies with strong culture outperform those without it. And culture begins with management that is open, honest and provides direction on how the company will grow, as well as how its employees can best contribute toward that growth (and their own).
That energy permeates from the top down to employees who are then motivated and compelled to work harder.
A PEO not only offers a ready-to-use HR infrastructure, but it also helps codify a business’s core values and mission that underpin the corporate culture. That’s important because, even though your existing business strategy brought about your present success, it will still likely need to evolve into a more formal, polished form once you incorporate new companies and cultures into the mix.
A PEO can provide the guidance and support to help you streamline and standardize your HR strategy and ensure it’s aligned with your company’s core values across the board.
Knowing your payroll, employee benefits and other HR-related priorities are properly in place, and your business is compliant with all applicable laws, brings peace of mind that’s nothing short of transformative.
When this happens, your leadership team and workforce become a like-minded, efficient machine – and you’re well-positioned to consider an acquisition.
Stage 2: Identifying and vetting potential acquisitions
When you’re identifying and vetting a potential acquisition, some aspects are easier to dissect and measure than others. A PEO can be instrumental in conducting human capital due diligence.
Due to standardized accounting principles, a company’s financials should be a relatively transparent view of its fiscal health, existing assets and product market fit. But how do you evaluate its leadership team, get a read on its company culture or reconcile vastly disparate benefits programs?
These are crucial aspects to a business that, if negative, should serve as red flags. Ultimately, these variables will factor into the final valuation of the company.
Because a reputable PEO will have domain expertise and intimate knowledge of your business, it can provide thorough due diligence of the potential acquisition. Beginning with the more concrete variables and then conducting an apples-to-apples comparison, a PEO can help you identify misalignments between things like:
- Internal policies on vacation, sick and personal leave
- Employee compensation, benefits and retirement plans
- Employment and consulting agreements
- Payroll administration
After that, the PEO can analyze the softer variables.
How is an employee onboarded? Have there been any lawsuits filed during the life of the company? In what subtle ways do the two company cultures differ? Is the leadership team of the to-be-acquired company receptive to a new culture? The list goes on.
By analyzing both the hard and soft HR metrics, the PEO can provide your company with a more accurate depiction of the potential acquisition, a service many outside consultants simply don’t have the technical knowledge to provide.
At this stage of the deal cycle, with the PEO’s guidance, your company should have a viable target in its sights. The challenges have been identified, and you can move forward confidently with the purchase.
Stage 3: Integrating the two companies
Once the transaction is complete, you now own two separate companies – each with individual identities, products, revenue streams and brand credibility.
Integrating the two organizations can be a challenge, but with the help of a PEO, human resources challenges are simplified.
After the purchase, you assume the other company’s payroll, worker’s compensation, health and welfare, and pension administration. Normally, you would have to figure out how your vendors and providers mesh with the acquired company’s vendors – on your own.
Instead, a PEO offers a turnkey solution.
The PEO knows your company well. It conducted due diligence on the acquired firm and identified all inconsistencies between the two. The PEO simply switches the new employees to your existing infrastructure, and you’re free to focus on business strategy (and continued growth).
Throughout that process, the PEO will help you inform the new employees of your existing employee handbook policies, like performance reviews or vacation time. Or, if your existing policies and procedures need updating, it can help with that, too.
The best PEOs will also help you define a process for ongoing communication between the two leadership teams to build rapport and alignment of the teams.
It’s inevitable that some employees will leave the company throughout the process, but many of the risk factors can be mitigated by good planning and clear communication.
As your combined entity settles into its new identity, you’ll likely find that working with a PEO helped stabilize and reduce HR expenses that might have otherwise adversely affected the bottom line year over year.
Moving forward, your PEO relationship should continue to serve you well beyond your M&A integration, providing the resources and insight that lead your talent to drive the top line – now and in the future.
Interested in learning more about the benefits of working with a PEO? Download our complimentary e-book: HR outsourcing: A step-by-step guide to PEOs.