The HR Practitioner’s Guide to Mergers & Acquisitions Due Diligence

Hello M and A Friends. This podcast is brought to you by dealdee. M&A is coming back. Would you like to avoid wasting hundreds of hours managing Excel Trackers and building PowerPoint reports? Do you want to make your process more efficient? Well, I have great news for you. Deal Room is MNA management software that saves you time, headaches and improves collaboration so you realize value faster. Learn more@dealroom.net Key here's to the deal.

That was my lovely daughter Shyla. If you want to keep up with the latest on M and A Science, our live streams networking events. When we release new resources, visit mascience.com and subscribe to our newsletter. You can Also follow our LinkedIn page to catch highlights of our interviews and if you like our content, please tell a friend so we can keep growing our community of forward thinking M and a practitioners the HR M&A Roundtable's annual conference has gone virtual for 2020. This world class event focuses on one of the hardest parts of M and A the human side. Join me and a great lineup of expert practitioners as we share how to deliver transaction value through the people, leadership and culture elements of a deal. You can save 10% on your registration when you visit M&A Roundtable.com and use the discount code Science. Now onto the interview. I'm Kisam Patel and you're listening to M and A Science where we talk with deal professionals and learn valuable lessons from their experience. We this podcast focuses on stories, strategies and what actually happened during M and A deals. Hi. Today I'm here with Clint Kendrick, chair of the HR M&A Roundtable, former Director of mergers and acquisitions HR at Oracle and HR M&A leader at Boeing. In his roles with Oracle and Boeing, Clint leads HR teams and oversees collaboration with multiple other functional teams and including corporate development, finance, it, shared services and go to market. Recently, Clint published a book, the HR Practitioner's Guide to Mergers and Acquisitions Due Diligence. Today we're going to talk about understanding the people, leadership and culture risk in M and A. How are you doing today Clint?

I'm doing well Kisan. Thanks for having me.

Clint, you're a tough person to get on this podcast. It took me a long time.

Well, I try my best to be available, but you know how skeptical scheduling goes when you're working a lot of deals every year.

So the first lesson I want to share with the audience is persistence overcomes all forms of resistance and hesitation.

Well, hopefully it'll be a good experience for us as we go through this.

Can you kick off with brief by briefly describing your roles at Oracle and Boeing.

Sure. So during my time at both Oracle and Boeing, I led the HR work stream for a number of acquisitions, joint ventures, and a handful of divestitures. And in that role, I'm responsible for pulling together HR teams and other individuals who touch the people, leadership and culture aspects of a deal.

Great. Well, tell me. Also tell me about these roundtables. Why? Do you think they're an effective way to learn M and A skills?

Sure. So I've started a couple of roundtables. I started one in Seattle when I was living there. I've since moved to the Midwest and started one up in Chicago, as well as a virtual roundtable and an annual conference. So clearly I'm a really big believer in the roundtable style of learning. In my mind, roundtable learning is peer learning. So when we work on a deal, we learn the lessons from that deal and we hopefully can apply them to future deals. But the reality is that even at my busiest, I was working eight, nine, ten deals a year. Most people don't have that kind of experience. They don't have that kind of deal volume. They're working with. A lot of hr. People are pulled into a deal either as somebody who is trying to set up a business for sale or somebody who is the catching HR leader for an incoming business unit. And it's tough for them to learn those lessons because they're doing one deal maybe in their entire career. By setting up a roundtable where we can learn not only from our own experiences, but from the experiences of others, I think that we elevate the entire practice of M and A. To me, that's really important because I've been that guy who was acquired a couple of times. I actually quit a job after they messed with my comp package and I took a million dollar book of recruiting business with me when I left that job. And so it affected that company. Now my book of business was obviously not the reason for that deal to happen, but it was collateral damage that affected that company and it affected me and my family and ultimately my community because I decided to relocate to take another position after having that experience being an acquired employee. So it's really important to me that we do M and A as well as possible because it affects companies and it affects people, real families and real communities.

So I'm here in peer learning and push the practice forward. Tell me about the book. Why did you write a book?

Sure. So one of the things that's missing out there is anything that talks about how HR practitioners can do due diligence. I know because I've looked and I've attended conferences and I've attended classes and there's just really not a lot of emphasis on due diligence. This book actually came out of a presentation that I did for the conference board during one of their HR M and A conferences. And I sat down and I put together the skeleton of my thoughts about what makes for effective due diligence. And it was so well received. I was asked to give that a couple more times to the same audience and I went, gosh, there really is a need here. And so I took those ideas and I took the best practices both from the work that I've done and the things that I learned from others, that peer learning. And I put it into 178 pages that I believe any HR M&A practitioner could take and really plug in as their due diligence playbook. And again, this isn't necessarily something that a large serial acquirer needs because they know how to do due diligence. This is something that individual practitioner, that person who is part of a company that is looking to buy. They can take the lessons learned in this book and and hopefully plug it right into what they're doing as an HR practitioner so that they can help make their deals more successful.

It's a good point. I, I was really interested in the views you brought in the book because it sort of gives a lot of light to what the responsibilities are for an HR practitioner in M and A. And I found it very valuable for those that may not directly be in HR role but can get a much better understanding of it because it is really important.

Well, thank you, Kisan. When we look at the studies that are out there and these aren't studies by HR groups, HR organizations obviously have a self interest in making sure that HR as a profession gets a little more respect out there. But these are groups like NY&McKenzie and other organizations that look specifically at M and A and the financial aspects and they all say that we don't pay enough attention to the people aspects of a deal at the right time. I've talked with a lot of HR practitioners that don't get involved in a deal until after announcement has happened and then they're scurrying to play catch up. And there are really limited opportunities after announce to do any kind of mitigation or planning work. Sometimes you get stuck with things that were put together even as far back as the LOI that really didn't belong in the loi, but there's nothing you can do to fix them if HR is brought in late. And so it's not just HR people saying this. It's folks that are in the world of M and A that are saying, you gotta look at the people aspect sooner. And hopefully with this book, it provides a roadmap to those things that we HR practitioners can do to help make deals more successful.

That's really a good point. There's not a lot of emphasis on that, particularly having the right people in the right roles at the right time. There's. People generally know that it's all about people, but there's not that real thought out approach into when people need to be doing what right.

And one of the things that I do in the book, Kisan, is I point to six different areas where I believe that people, leadership and culture diligence can make a difference. And then I walk the practitioner through how to mitigate some of those risks. And all of this, by the way, is before close. Now, some of risks will be mitigated during integration. That's just part of the game. But there are specific things that you can do in crafting the loi, in looking at the deal terms and conditions, in looking at the financial models and looking at leader retention. All of that can be done before announce. And if you're pulling HR in after you announce, you're missing a lot of opportunities to help realize deal value earlier on in the process.

Interesting. What's one of the biggest lessons you learned during your time in HRM and A?

So one of the biggest lessons I've learned is that we M and A practitioners, we don't talk to each other enough, even on our own deal teams. I actually opened my book by telling a story about the first deal that I led with the training wheels off. So I'd had a couple of deals, I'd been acquired a few times. I had a pretty good idea of how it works, and it was my turn to step up to the front. And we acquired this company. And I'll be honest, I was doing my victory lap. We were really excited. We got through the announcement meeting and then we came back the next day. And one of the most critical technical employees was not happy. And not happy is an understatement. I mean, he was pissed. He felt like he had been devalued in this process because he hadn't received a retention agreement. Well, he'd never even come to my attention as the HR guy on the deal. And part of that was because I hadn't taken the time to reach out to some of my peers in our other functions. And after that, I actually called somebody that I had met through a roundtable and I said, oh my gosh, how could I have avoided this? And she recommended doing what I call a post diligence huddle. And that's actually one of the things that I cover in the book, is using a post diligence huddle to sit down with everybody who's part of the deal team and ask questions about two things. One is about the people who are the people that we absolutely need to retain. Because a lot of times the folks that are working through the deals are really concerned with top leaders and getting them incentivized so that they will sign the deal. They know that their futures are secure. They know what's going to happen with them after their company is no longer their company and getting them over that finish line. But we don't often pay attention to the next level down. Sometimes we can deal with that as we get ready to prepare job offers or do transfers or whatever that looks like. But some of those folks need more primary consideration. In this particular case, the guy that was upset had written most of the source code. So important guy to keep happy. And we. I have not made that mistake again since then because I've started asking those questions about who is really critical for us to hang on to on the front end. The second thing that I ask folks to cover in the post diligence huddle is really around how are we going to break the business during integration? And in hr, we call that culture. Other people don't like the word culture. So sometimes I'll just refer to it as operational readiness. But what are the things in the business that we're going to break when we pull them into our organization? And I'll give you a perfect example. We purchased a company and one of my prior employers that built drones. And their supply chain, their procurement process was they would go down to Napa Auto Parts and they would buy the pieces that they needed to build these prototype drones. And you pull them into a large organization that's a government contractor that has very specific rules about how you buy things. And all of a sudden, a process that used to take two hours. You get in your car, you drive to the auto parts store, you give them your credit card, you bring the parts back, you continue your build, and then you submit an expense report. That process now takes weeks because you have to get supplier approval. You have to make sure that the part is in the catalog. These are important elements of culture that often get overlooked. And then when you get into oper, the post integration business, all of a sudden you're wondering why you're not delivering things on time. And while that isn't directly a people aspect, it is part of the culture of that organization that will have to be addressed as you operate the business.

So the two big things is around retaining people, identifying who those key people are, and then also looking at some of these operational risk as well.

Absolutely.

One thing I really liked about your book is when you draw the parallels between buying a house and buying a company. Can you explain the similarities and difference between those two purchases?

Sure. So my folks are real estate agents, so this has been kind of drilled into me as a parallel. But I find it's one that really works for folks that are only around the M and A process on the margins. Because everybody knows somebody who's bought a house. You may not know somebody who's bought a company. So if we start with the house hunting process, I relate that to the target screening process where you're going out and you're looking for something that's going to help you meet your strategy. So when you're house hunting, it's a very different process. If you're just starting your family and you might want a smaller place in a good school district versus a hunting cabin or a condo in the city, you've got very different needs depending on what your personal goals are. Very much the same for a company. And then you move once you've selected a place and you've put in your preliminary offer or your letter of intent. From there you move into the home inspection process, which is due diligence. In fact, I a lot of times refer to due diligence as the, you know, M and A home inspection. And that's where I spend most of the time in the book is really covering that due diligence. Process integration planning is just like planning to move into your home. And you're probably going to do that about the same time as you're going through your home inspection. I know when I've purchased my homes, I've been going, okay, this is where I'll stick the couch. I really don't like that paint color. I really want to do something different with that kitchen light. So I'm already planning to move in even before I've got the keys to the house at close. And then obviously we move in and hopefully we become a good neighbor, a good citizen, and in the case of an M and A deal, hopefully we've captured some value and recognized the deal thesis.

How do you define due diligence? And why is this so vital to M and A?

Yeah, so in the book I really look at due diligence as the art and science of identifying, assessing and mitigating risks associated with an M and A transaction. Kisan I go in with the assumption that the corporate development team has done some really phenomenal job of making sure that the acquisition will make money. That's their primary goal, is to make sure that there's some sort of strategic end, usually around ROI or growth or some sort of financial metric. And my job as an HR practitioner is to support the assumptions that they've made. Well, the things that are going to derail that deal thesis from being met, the things that'll keep us from achieving that ROI or that growth strategy, a lot of times are going to be people, culture and leadership risks. But in HR we do have a couple of others that we look out for. And it's not enough to just identify the risks, in my opinion. We then have to assess them. Is there a materiality threshold? Are they significant or can we deal with them later? And then finally how do we mitigate those risks? So I see it as an entire system that helps us in HR to support the individuals who are trying to make this deal make money.

This is interesting because it sounds like you're starting to poke at the deal model itself that the corp dev team comes up with. And I think we both know they're very protective around that. How do you sort of work around that and bring up those issues, especially when people are really reserved around keeping it to get the deal done?

Yeah, so it all comes down to what are the incentives. So if the deal team is really just trying to get a deal to close, then there may not be an opening for HR to get in and really have a conversation about what this takes. But I found that at least working with in house deal teams that I really want to make sure that this deal is the best thing for the company. So if we can sit down and have a conversation about what the final integration plan, rather the final integration model is going to look like, I can then ask some questions about the HR elements of that that will help them meet their ultimate goal of getting a strong roi. So in those situations where I've been able to get in prior to loi and look at some of the assumptions that are being made, I can at least point out some of the the financial impacts of the deal model on one deal for Example, the severance estimates, because we knew that there were going to be some layoffs, were really quite low compared to what we were likely to encounter in actuality. And that would have just thrown the entire deal model off if they had run with their preliminary assumptions. On another deal that I worked on, we had a situation where the final integration model for this acquisition was going to be using it as a springboard for growth in a specific geographic market. Well, there was not the kind of talent in that market that we were going to need to grow that business in that location. It was just an impossible task to start with because there weren't the people available to do the work that we needed to get done to have that deal work. So deal teams that are really looking for that solid return, that are really looking to make sure that this thing makes money or achieves its other goals, it's really in their best interest to partner with HR so that we can help provide that input so they don't end up really stubbing their toes.

How do you work with other functions when you're pursuing this approach in diligence? Because I would assume you need to touch all these other functions as well.

Yeah. So I find that being highly collaborative is the best way to go about this. If we all have a shared understanding of what the final integration model is going to look at, or, excuse me, the final integration model is going to look like, then we can go in and look at how each of our work streams is going to affect whether or not this deal works. So a lot of the places where I'll get involved early on are looking at, for example, how people transfer or how we sever people. If there's going to be some sort of reduction in force that touches, in most organizations, tax and finance, because there's a whole legal entity conversation to be had, it might actually affect the way that we do the deal because in some countries, the way that employees transfer from one legal entity to another is affected by the type of deal and some of the assumptions that are made. So I need to get in with those organizations that are going to have an impact on the people side of things to understand what they're thinking and have them shape my thinking and have me shape theirs. Usually who I end up working with are folks in tax and finance. I end up working a bit with folks that are in procurement. Depending, again, on what that deal looks like, I end up working quite a bit with folks in IT because I think we've all seen situations where it integration isn't smooth. That definitely affects people and their ability to be productive on the job. So knowing who I'm going to be working with and being able to plan well for us to be able to integrate and ultimately achieve the deal thesis is really important.

Collaboration is key. And when I think of collaboration, I think of data communication. What's the information ecosystem look like and how does it impact the deal?

Sure. So when I look at the information ecosystem in a due diligence context, I'm really looking at all of the different places where we can learn about a target company. So usually I think about this as beginning in the target screening phase, where I can start doing independent research on the target company. I can go out and I can get public information. So if you think for a moment, going back to our house buying analogy, most folks know the kind of neighborhood they want to live in. They've gone out to some kind of website, they've checked out the schools in that neighborhood. They've looked at the property taxes, they've looked at the walkability index, they'll look at the utility costs. So they'll have really looked using the Internet, at the neighborhood they want to live in. And I think doing something very similar with a target company is important. So I'm going to look at the target company's website. I'm going to understand what they say about themselves, what are their core competencies. I'm probably going to look at their press releases. I'm going to look at their About Us page. I also want to understand what their hiring and recruiting needs are because that'll give me a pretty good sense of how they're positioned in the market. I'm going to go out, I'm going to look at social media, so I'm going to look at Glassdoor, I might look at Yelp, I might look at some other websites that provide ratings on how the company's doing both with their customers and their employees. Employees. I might pay a visit to LexisNexis or some analyst reports like what D and B has, or if there's some other types of information that I can get my hands on about the target company just to get a sense of what they're looking at. Sometimes there's been a big lawsuit or something and I can't necessarily get filings. But if a company's in big enough trouble, I can see what's going on there. That's the public piece. I think one of the pieces of information, or excuse me, one of the sources of information that are often overlooked is folks that are in house So a lot of times I find that the companies that we're acquiring, we know people who know people over there. They've either worked there in the past or that the target company may be a customer or a supplier. And there are ways to find out information either by having that person disclosed on the transaction or asking more general industry questions that don't necessarily target just, just the target company, but can talk about a couple of competitors where we can extract some valuable information from those folks. In some cases we can also look at using outside experts and gathering competitive intelligence. So there are services out there, and I've not personally done this, but people in our roundtables have. But there are services out there that can basically generate an org chart for you. They're primarily used for recruitment and for executive sear, but they do have M and A applications. And I've talked with folks who've used this type of approach to diligence before doing a purchase. So those are all the pieces that I don't even have to talk to the seller to understand what's going on in their business and at least start to get my arms around it. And then we have the more traditional pieces which, you know, looking at the sim, looking at the information that we get through the checklist, through our due diligence interviews and our site visits. So I consider all of those things to be pieces of the information ecosystem and they're things that will really give us a much, much more complete picture of the target company and help us to understand where we might have some challenges again having this deal make money.

Those are really interesting points, particularly around doing diligence with online tools. I think that's the more modern trend we see, that there's so many more data sets and tools available that are highly accessible and public. I want to get back in your book where you talk about the six major HR risks, if we can dive into each of those that you mentioned earlier, but maybe give some more specific examples.

Sure. I tried to put the risks in order of importance to somebody on a corporate development team because ultimately I see HR's job is really supporting the deal, supporting the business, supporting the transaction. So the first place that I'm going to look is at financial risk. And I do think that there's a fairly good job done of looking at major financial risks. So this would be things like pension liabilities or some sort of retiree medical plan that may be underfunded. That's obviously a fairly significant financial risk. But there might be situations where there has been some sort of violation. So it's not uncommon, for example, to see violations of the Fair Labor Standards act where an employee has been misclassified. They're supposed to be hourly, but they've been listed as salaried. And there are back wages that are owed, and those can be really, really substantial. And if that's not something that's being looked at in diligence, you could end up with millions of dollars in back wages that are owed. And if you don't need to go against the escrow, if you don't need to work against your indemnities, why do it? At least know about the risk up front. The next area that I look is on operational risks, and I gave an example of that a little bit earlier, looking at buying parts from Napa versus buying them through a supplier. But speaking more specifically to hr, I was on a deal a number of years ago where there was a small company we were acquiring, and their recruiting method was to go out to the local community college and say, hey, who do you got? The community college had a good relationship with the target company, and they would send them over a couple of students. And this business relied on high turnover while these students waited for job opportunities to come knocking in a somewhat constricted industry. And they went from being able to simply pick up the phone and call the community college to being acquired by a large company where all of a sudden there were rules around recruiting. You had to have a requisition open for so many days, and then you had to have so many people that you interviewed, and that completely changed the way that talent was brought into this organization. I called it out in the diligence report as an operational risk. And it's kind of one of those I told you so moments where we in HR have to very nicely find a way to say I told you so. But when it came to fruition, and it was taking 75 days instead of two days to fill an opening, and it was causing timelines to slip, and I was able to say, hey, it's in my diligence report. And in fact, I asked you right after we closed if you wanted me to start dropping requisitions for you so we could get out in front of this. And you told me, no, it's not going to be a problem. So do you want me to go ahead and start dropping those requisitions for you now? It definitely caused an operational problem because of changes in HR policies. The next area that I talk about is compliance risk. And usually when I think about compliance Risks I'm looking at things that are going to end up with some sort of government imposed fine or penalty. And so this will have a lot to do with the integration plan. So if you're planning to do layoffs, for example, as part of an acquisition, are you going to be compliant with the Warrant act, which requires advance notice be given to both employees and government agencies if there's going to be challenges? I talked about Fair Labor Standards act compliance. That's also a compliance risk that has a definite financial, excuse me, definite financial implications. I also recommend looking at things like employment terms and conditions. So if there's non competes or non solicits that are part of employee terms and conditions, are they really going to be enforceable and are they important to your business model? So do you want to make sure that you understand those compliance risks? The fourth area is leadership risk. And leadership risk is one of those areas that I honestly don't believe we do a very good job of assessing. I think that this is an area where private equity definitely has an advantage over strategics. Private equity firms tend to bet on the jockey more than the horse, is the expression I've heard a few times. But with the strategics, we don't tend to have the same kind of in depth conversations or formal assessments that are done. Excuse me, we don't tend to do the same types of formal assessment of potential leaders that some of the more advanced private equity firms do. We kind of work on a trust me model of leadership and unfortunately it creates problems with retention, it creates problems with morale. I had one situation where we ended up with a leader who after the acquisition was done, worked to sabotage the integration. It was sort of underhanded on the slide, nothing. So over that we'd fire him and he would lose his earnout. But he was certainly not as helpful as he could have been and was actively working behind the scenes to slow things down because he didn't like the direction things were going. And when I started to talk with the Corp dev folks who had been at the dinners who had been working on the deals with this guy, they kind of knew he might be a problem. But it wasn't an area anybody looked at as they were rushing to get the deal done. So that's a kind of extreme example, but we definitely want to understand how these leaders are going to play into things. Culture, risk. And again, this is where I look at how changes in the way work is done are going to affect the combined company's ability to deliver products and services to customers. So that Example with the change in the supplier management process for buying parts is a really, really good example of a culture risk. And then finally we've got to look after the HR function as well. Just like procurement has to look after procurement and it has to look after it. HR can't just focus on the people related financial operational compliance risks plus leadership and culture risk. We also have to look after HR functional risk. And that could be anything from the basic blocking and tackling of how do we pay people and get them their benefits to more sophisticated things like how are we going to integrate the HR systems of record. So quite a few things that we just have to take care of for HR to mind our own house.

Those are all great examples. What are the actual deal killers?

Well, I think that depends a lot on the organization. So I've only run into a few HR related deal killers in my career and those have usually been significant financial risks. So in one case we decided to pass on a company because there were just the underfunded pension liability was just too high. The second situation where I've personally run into a deal killer related to HR was a massive leadership clash between the target company CEO and the catching business unit leader. So the Corp dev team had found a great target company, looked good on paper, but. But when the CEO and the vice president of the catching business unit sat down, it was just really clear that they were not going to be able to work together and so they killed the deal. So those are the only two times that I've seen an HR situation that's caused a deal killer. And Kison, I think that's a lot of why HR issues get ignored early on in a deal. It's like, well if it's not going to be a deal killer then why do we need to look at the HR pieces? And I would say that it's really not necessarily about the deal killers. It's about all of the mitigations that can happen in early integration planning and then also looking at your definitive agreement and whether or not there are changes that you want made to that as a result of some of the people issues that come up.

So from what I've seen, the worst thing that could happen is you lose key people during integration.

Yeah, I would say that there are probably worse things that can.

Well, one of the worst things. One of the worst things.

Yeah, yeah. So it depends a lot on who those key people are. But I've seen deals that were done basically to hire really high level technical professionals and it's not just about losing Key people. It's about losing significant numbers of those folks. And then one of our roundtable members, a guy named Mark Walstoni, he refers to it as the triple bump. When you start to lose your key players. The first bump happens when the announcement occurs and you end up losing all of your A players. So that's your first bump. All of your A players disappear. An acquisition announcement is like blood in the water. If headhunters are sharks. They come in, they try to pull all your good people out. Especially if they don't have some kind of retentive mechanism in place or there's not clear communication, they're going to go take care of themselves. I mean, that's what A players do, right? They're A players because they're proactive, they're in high demand, and they will go work somewhere else in a heartbeat, even in the middle of a pandemic. Your B players then end up trying to fill A player shoes. And your second bump really happens when your B players are so demoralized and demotivated that they actually end up underperforming themselves. So you've now lost your A players, your B players are now your C players. And then the final bump happens because the organization now has such a bad reputation that you can't recruit new talent. So it's not just about losing a handful of key employees. It's about really messing with your entire talent ecosystem. But there are other risks that come up. It's not just about losing those folks. If you think about it, if IP ownership isn't managed properly and you've got a situation where you're missing IP agreements and then all of a sudden you find out that they're. There's a dispute over the source code for something that's a significant financial risk that comes up. Or you end up mired down with different decision making styles and nobody can make a decision to save their lives and you end up tanking your whole business. AOL, perfect example, the AOL Time Warner merger. $99 billion in lost value. Now, part of that was because the broadband revolution was happening at the same time. But I'd like to think that had those leadership teams been on the same page, they would have made much, much better decisions that would have made sure that AOL could still be a player in today's broadband world. So I do think that it gets a lot worse than a couple of people leaving.

I get a lot more insight out of that. How about those key people though, in terms of retention? What's your approach when it comes to.

That, yeah, I think it depends on the deal. The old trope of every deal is different. I actually spend quite a bit of of time in the book. Probably one of the longest chapters is dedicated to looking at retention incentives. So I tend to look at retention as a risk factor using a traditional heat map for folks that are familiar with risk management inside the project management context, using an impact probability matrix. So I look at the probability of the person leaving and sometimes that's good. I also in the book provide a couple of ways to start thinking about the risk of flight, the probability of a person leaving, and then I look at the impact of the role being vacant, both on integration and on ongoing operations. And depending on where a person sits in, the impact of their departure and their risk of flight. Where those two things intersect, it really tells me how much time I want to spend thinking about the retention plan for that individual. I also tend to look at retention. Let's say we've got an individual where if they leave, it's going to be catastrophic, it's going to cause serious problems if they leave and there's a moderately high risk of them leaving. Well, what do I do? Well, I've got a menu of options available to me that could range from financial incentives to like throwing more money at them. If they're a key person that has some deal consideration, we could look at holdbacks or earn outs or some other mechanism where there's delayed deal consideration. But we can also look at non financial incentives like where do they want to go with their career? Is there a job title? Is there a remit that we could give them that would be more likely to keep them on board? Can we make sure that their integration as a leader is more effective by giving them, say, a chief of staff who's familiar with the catching business unit can really help guide them and get them in integrated more efficiently. So I think that there's a lot of different options that we can look at when it comes to retaining a leader. And it really depends on the situation. And again, in the book, I really spend a lot of time talking about just all of the options that are available for organizations to really look at how they want to hang on to those key players.

Is key person insurance a real thing?

Yeah, so when I think about key person insurance for the work that I do, a lot of small organizations have that, because if a person who's in a key role dies, it could absolutely destroy the business. And so they buy that key person insurance to make sure that basically they can pay off their debtors and take care of the rest of the business if they go away. I think that it can be helpful to understand where there's key person insurance in an acquisition because that can tell you who you really need to work on retaining a larger organization. Acquiring a smaller organization will probably have some stopgaps that don't require insurance, but it can at least give you some insight into how critical the business perceives that person, that they've gone and done the work of insuring them in case they do pass on.

Can you walk me through how side by side comparisons work?

Yeah. So a side by side comparison is something that could impact the financial model of a deal. It can also really impact employee morale during a integration. So when we look at a side by side comparison in an HR context, we're looking at different elements of the comp and bend package that's made available to the employees. So we're looking at everything from base pay to bonuses to the way that equity is managed. Looking at medical, dental, vision plans in the us, other wellness programs, pension and retirement benefits, other insurances, how do we handle time off for employees and then how do we handle other perks like company cars, paid parking, gym memberships, pet insurance, those sorts of things. And looking at where the company is now and what the integration model would have happen with them. And if the integration model is to leave them standalone and you're not going to mess with comp and bend, then it's great. You really don't need a side by side. You know what that's going to look like. But if there are going to be changes made to bonus plans or medical insurance, those can be really costly and they need to be factored into the deal model and they also need to be factored into the change management plan. And the only way to do a proper side by side is to understand what the proposed integration model looks like and then you can go do some cost analysis and again do change planning. So really, really critical tool for HR to provide as much value both in the due diligence phase as well as during integration.

Yeah, it's interesting. Kind of gives you more of a comprehensive view and sort of allows you to zoom in on individual person to get a sense of what they may be seeing, how this transaction impacts them, but then also zoom back out at the whole picture.

Yeah, and usually I won't do a side by side on just one individual unless it's one executive with a very, very unique set of executive perks. Usually we're looking at larger groups of people and looking at them in the aggregate for privacy reasons. In a lot of cases we won't even have access early on to individual level data due to privacy laws. And honestly, at some level I don't really want to know about an individual employee situation. Yeah. So those tend to be done in the aggregate.

Got it. That makes a lot of sense. What have you seen with the staffing level? Because in your book you mentioned how sometimes companies start shifting things in preparation for a sale. Then I'm curious on your thoughts, the do's and don'ts there.

Yeah, so I've seen in more than one situation where a company will start to do some housekeeping before they get ready for sale. And it's probably not a bad practice. It gets the company looking a lot cleaner on the financials. They've done some housekeeping, they've gotten rid of some folks that maybe would thrive better in other organizational environments, let them have a chance to go thrive somewhere else. But sometimes they undercut the business too much to make the payroll costs look like they're cheaper than they really are and you end up with a bunch of really, really frazzled employees. And that's one of the things that going out to a social media site like Glassdoor can actually give some insight into. If every employee review says, oh my gosh, I was just so exhausted because I'm putting in 80 hour weeks that tells me that we're probably going to need to do some recruiting because those folks are either going to to burn out and leave or they're just going to burn out and not be productive. So understanding if a company starts, has started to make headcount cuts as part of their preparation for sale can help me really look at whether or not I'm going to need to do some additional recruiting as we start integrating this business and trying to make it operate inside of our catching organization. And I will say Kisan, that like you mentioned in the intro, my stuff has all been in house. So other organizations that have different ownership models might look at that a little bit differently. But for me as an in house and that's really trying to guide a business in how to be successful and how to run ongoingly after the acquisition. Staffing levels are pretty important to make sure that we can fulfill the mission of the organization as it looks at ongoing operations.

Yeah, it is interesting because you might work with a company who's got an external advisor advisor and they're more financially focused on the financial buyers and they're suggesting really pushing to get as high of a EBITDA number they can. And that's what prompts them to start doing staffing cuts.

Yeah, we ended up with a situation where this organization had laid off almost every single person in their sales organization. And we did the acquisition and we came in and I just remember having to have a little bit of a poker face while their head of sales proceeded to tell me that each and every person in the sales organization was key or critical to the success of the business. And I'm sitting here going, most of these folks have been here for four months. You just cleaned house. What do you mean? These folks are all key and critical? Come on, man. So it is interesting what happens sometimes when folks do that kind of housekeeping and backfilling.

So you talked earlier about the risk with people and essentially, how do you weight it? But I guess on a broader level, how do you weigh risk so you don't get caught up in things that may not be so important.

Yeah. So I have some guidance in the book around materiality levels. And of course, each company is going to look at this a little bit differently. This is something that I pulled together based on my conversations with other folks in the roundtable. So really looking at how something is going to affect the complexity of the integration or how something is going to affect. Affect the financials really needs to be taken into account when looking at how much time and attention are we going to pay to this as we go through integration. I do think that there's a tendency amongst HR practitioners, I know that sometimes we can be like the boy who cried wolf. I was there myself early on in my career where I was like, well, this is important. What I didn't understand until I had a mentor help me out was that, yeah, it's important to me from an HR lens, but it's actually not all that important in the context of a multimillion dollar business. And I think sometimes when we do diligence, less experienced HR folks can really get caught up in, well, this is a compliance issue, or this is a morale issue. But when we really pull out and look at it in the context of an overall business, it's like, well, yeah, it is a compliance issue, but the fine is going to be $2,500 and we're paying 500 million for this business. We will cut the check, thank you very much. So we do have to be sensitive to that. And hopefully by really drilling in on, okay, what is the risk on integration or the risk on operations of these things we've identified that was A really messy sentence. So I apologize. But if we can look at the impact on integration and the impact on operations in the context of the greater deal, I think it helps us in HR be more valuable supporting the business and what its goals are.

Interesting.

Hopefully that came out in English this time.

No, I like that because in the book you provide some interesting examples of templates to sort of think through that as well, which is pretty helpful to see it actually, visually.

Yeah, yeah. And in fact, I think on that same template, I also talk a little bit about reputational risk as well. And I think sometimes that is actually downplayed when we look at financial risks. But if you look at the impact of something like a compliance risk, looking at me too, for example, if you have somebody in your organization high up who has accusations of sexual harassment and they're not dealt with, that can actually really hurt a business and where that business is going. So there may not be a fine associated with that or a lawsuit might get quietly settled. Settled. But if a company's got that kind of reputation on the extreme end, that's going to affect its ability to go sell in a market. Or if a company has. Does something during integration, that's going to give it a reputation in a certain area. So let me give you an example. If you've got an acquisition where you're merging two plants that are close to each other, it can have a really significant impact on the community where the plant's being closed down to consolidate into the other one. And you might not change your integration plan because that risk of a bad reputation emerges. But, gosh, you sure want to know about it so that you can get your messaging taken care of in advance instead of, you know, waiting to be reactive with it.

Yeah, those are interesting and seems like they're very tricky to assess. I know the other big one we've seen in the news in the past year was with Yahoo and Verizon when they had the data breach during the transaction and they had to adjust the price of the transaction, which isn't a very tangible thing to assess when it comes to reputational damage.

Yeah, yeah, it does get tricky, and I'm glad there are folks out there that know how to model that much better than I do.

Well, I don't know if it comes down to modeling. When it comes down to the final what's done at the end of it, it seems like it's sort of that reference of deal fever and people just want to get the deal done. And let's figure out a number that Works right.

Right. Well. And sometimes that's the right move to make. Again, I see my role in HR as providing information, but very seldom am I going to wave my arms and request a different decision be reached. I've got my internal help chains in my internal jobs where if I think something is going to go way off the rails and present a significant problem to the company, that I can bring up issues. But one of the nice things about being in house is that for I spot an issue that I think is going to be meaningful, I've taken the time to build the relationships. I pick up the phone and I have the conversation and then we figure out how to work through it. Am I missing something in my perspective, or is this adding new information? And since we're all on the same team and we're all working towards the same goal, I think it is really an advantage to be in house when those types of situations come up.

What's the most essential advice you offer in your book?

So the most essential advice, I actually save for the conclusion. A few years ago, I was speaking at HR west, which is one of the biggest conferences for HR practitioners, and I was giving my presentation on due diligence. They had heard about it and they asked me to bring that into HR West. And I had a room of about 50 or 60 people sitting there, and I ran them through the risks, I ran them through the information ecosystem, I ran them through mitigation options. And I had this lady who was, honestly, she was ready to retire, she was ready to be done with her HR career. And she asked me that same question. What's the best piece of advice that you can give me? And I took a minute to think because there's just so much information on due diligence. And it was the first time I was really asked that question. And what occurred to me then and what sticks with me now is that no matter what is covered in a book or what shows up in your documents, you really have to trust yourself. If an HR person is put into the middle of a transaction, they were put there because their leadership trusts them to do the right thing. Their leadership team wants them to help the deal to be successful. And so they have to trust their knowledge of the acquiring company. They have to trust the information that they've been able to get on the target. They have to trust what they know about their leadership team. And then they just have to apply some common sense hr. And I really think that's the best advice that I can give to any HR practitioner who's dealing with a transaction for the first time. Trust yourself, trust your professionalism. It's all you can do. And then Kisan, to that I would add a 1B and that is still look for help. We've got organizations like the HR M and A Roundtable. We've got my book which will help guide through due diligence. There's a lot of information and a lot of help out there that can help move from that kind of gut feel approach to something that's got a little more oomph behind it because there are people who have been there before and are more than happy to help out.

Hey, I would 100% second that. I personally read the book, found it a great read because it's one easy to read and very practical and up to date with today's approaches and I think think it's pretty versatile. I know you hone it in on hr, but I can see a lot of benefits from somebody in Corp Dev even reading it. So I do think it's a great read all around for anybody just generally interested in following today's M and A practices. And along with that, the HR M&A Roundtable is a wonderful group and if anybody follows the podcast, you've probably recognized some of the feature members. I know Kim Jones, I did interview with her not long ago that will get published soon. Sally Cunningham had a killer interview about HR divestitures as well as Jillian Sisik at Caterpillar. So definitely a great group of corporate HR M&A professionals.

Yeah, all, all fantastic folks and I'm just hoping that I can keep you saying yeah, I've had some great HR folks on my podcast.

Yeah, keep keep meeting them through your platform and you're also hosting a session at our upcoming M and A Science Virtual Summit. So if you're still listening to this and I hope you enjoyed this interview, definitely look for Clint there. But before I get away, let you get too far away from me. What is the craziest thing you've seen in M and A?

Clint so probably the craziest thing that I have seen in M and A. We bought this company, a small family owned business and we were putting together the packages for the key employees and the founder stopped and asked us where the offer for his son was. Well, his son wasn't an employee in the business. His son was a PhD student who had been a contractor to this business during the summer and he made it very clear that he was not going to sell his company unless Junior had a job. And boy that led to just all sorts of really interesting conversations and discussions about whether or not that was a deal killer for him, us, and how we would mitigate the risk of bringing on a potentially problematic employee or somebody who could do great. But that was probably the craziest thing that I've run into.

Wow, that's an interesting contingency there.

Yeah. Yeah, I thought so too.

Well, at least it was one family member, not multiple, right?

Yeah. Yeah. I'm not sure how we would have dealt with that, but that was definitely interesting. And on that one, what was even more interesting is this guy had a bunch of accrued vacations saved up and right after we closed the transaction, he disappeared for about three months. Available by phone. But yeah, just nobody had made it clear that his participation in integration was as critical as. Or was as critical as, oh my goodness, let me take a step back here. So nobody had made it clear that we were expecting him to participate in integration at the level we were so mismatched expectations on that. So we got to test Junior and it turned out that he was a really good guy. He knew the business pretty well. And so it all worked out with, with him leading through integration. But yeah, it was nuts.

Wow. Clint, thank you so much, so much for your time. I learned a lot and enjoyed the conversation.

Great. Thanks, Kisan.

Thank you for taking the time to explore the world of M and A with our podcast. Please subscribe for more content and conversations with industry leaders. If you like our podcast, please support us by leaving a five star review and sharing it. I enjoy hearing feedback and connecting with our listeners. You can reach me by my email. It's Kison K I s o n dealroom.net M&A Science is sponsored by Dealroom, a project management solution for mergers and acquisitions. Additional educational content is available on Deal Room's blog@dealroom.net blog. Thank you again for listening to M and A Science. See you next time.