The People Side of Business Acquisition: Questions Every Investor Should Ask

There’s a lot of buy/sell of small and mid-size businesses across Canada these days, as baby boomers advance their exit strategies and move on to other pursuits. As private equity investors do their due diligence, diving deep into EBIDTA, product and service offerings, and the growth potential of a targeted acquisition, the impact of the people side of the equation is too often a minor or under-explored consideration in the overall buy decision. By asking a few key questions about the selling company’s people strategy, investors can gain significant insights into what they might expect once the transaction is complete.

How effective is the current management team in running the business today? How many and who on that team would be key players under new ownership? How aligned will they be with a shift or major change in corporate direction? Those who may have taken the company to where it is today are not necessarily the ones to take it to the future. At the same time, there will be invaluable tribal knowledge that longer term leaders and key contributors have that could be leveraged under new ownership. Who will stay, who will go, and who will need to be hired, requires many truthful conversations to determine the leadership landscape the new owners will face.

What aspects of the corporate culture are essential to the company’s current success, and in particular, its brand with both customers and employees? What aspects of the culture need to be changed in order for the company to survive under a new regime? If significant culture change is needed, will the new leaders of the organization have the right stuff to drive new ways of thinking and behaving? Change management is often executed poorly with disappointing results, so any major shifts will require their own strategy and plan, with realistic timelines.

How formalized and relevant are the company’s current people practices?  What efforts have current leaders made to ensure the way they recruit and retain great people is in keeping with contemporary practice?  What is the current philosophy around developing people, and what impact will a change in ownership have on key players they will want to keep? If there is a significant downshifting or sidelining of mission critical people strategies by the new owners, star performers will likely pursue career opportunities elsewhere, ultimately leaving the newly acquired company with a weakened team.

No matter the investor’s view of a targeted company’s revenue potential, if the company’s people strategies and practices are not fully understood both for their strengths and opportunities for improvement, there’s a good chance the acquired organization’s performance may not live up to the potential investors have planned. Typically, private-equity investors are focused on relatively short-term business results, which can run counter to the behaviors and philosophies of the current organization. Asking these questions during the due diligence process can provide a realistic picture of how well their investment interests will align with what the seller has on offer, and how well the organization can truly deliver on that promise.