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HR’s Best Practices for Protecting Employees and Deal Value During Divestitures and Carve-Outs

Kison Patel

Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.

CEO and Founder of DealRoom

Undoubtedly, Human Resources deserves a seat at the M&A table.

As more practitioners are taking culture, the change curve, employee satisfaction (a satisfied employee equals a productive employee), and employee expertise into account during deals, HR’s role continues to grow.

Specifically, during complex divestitures and carve-outs, HR personnel must act as a liaison between many functions of both the buyer and seller, while simultaneously producing key data that will help protect the employees affected by the deal and support the deal value itself.

Here HR experts share their best practices for supporting divestitures and carve-outs

How should HR start the process of moving employees? What strategies can help?

  1. Be clear about what is being sold; this includes understanding the very specific products and/or assets being sold. Specifically, you must understand how the assets and legal entities are being packaged; nothing can be done until these parameters are set in stone.
  2. Next, HR can begin identifying the people around the assets being sold. Begin with determining the “core population” - the people most closely connected to the function and success of these assets. Identifying this population in scope for the deal is usually fairly straightforward. 
  3. Building off of the core population, and slightly more challenging is the examination of the support functions (which are often shared functions). You’ll want to divide these shared service roles and individuals into groups with the determining factor being if they spend 50% or more of their time serving the portion of the business being sold. This step is critical because you do not want employee census numbers to vary too much when you get to the diligence stage. 
  4. With the above populations in mind, you’ll want to ring-fence your core population. A conversation needs to take place with the fenced group regarding a retention plan so these employees know they are “locked in” and cannot apply for roles outside of the ring-fence in your company. 
  5. While ring-fencing is an important practice, HR needs to monitor the fenced group and prepare for, and fend off, problems that may arise relative to the core group. For instance, a worst-case scenario would be a leader or other highly visible person wanting to move outside the ring fence since this can affect the confidence and retention of the others in the fence. When these situations arise, HR must tighten up communication (more on the importance of communication below). Additional situations related to the fenced group that HR may need to navigate are circumstances such as fenced members wanting to retire. Being able to help these people and assess the loss will not only speak volumes to employees but will also make for a grateful buyer. 
  6. Finally, while this aspect does not solely rest on HR’s shoulders, HR can facilitate the buyer’s realization that the best buyers court the ring-fenced group. Buyers that court the key population create the vision of a bright future, which aids morale and, consequently, boosts productivity. 
Read also:
How M&A Affects Employees - All Questions Answered

How does HR help create a robust communication plan?

The best communication plans begin with detailing the compelling reason for the deal:

  • Why is the deal taking place?
  • What is the vision behind it?

Perhaps it is a better strategic fit for the business or perhaps it opens the asset to new markets.

Hence, it is important that before creating a strategy, you understand why it is so important for you to focus on it and give it your hundred percent effort. The timing of the announcement also matters as employees and important clients should be finding out about the divestiture from you rather than from a TV screen or phoenix billboards.

In addition to outlining the strategy behind the deal, having credible leadership in place is also essential.

In fact, having the buyer included in the deal announcement will have a positive effect on the employees who are part of the deal and will help secure their buy-in.

At this point, the outbound terms of the deal must also be in place. Specifically, the outbound terms include the buyer’s commitment to salary and benefit compatibility.

In addition, the outbound terms should include paid time off and severance benefits. HR works to secure these comparable outbound terms and conditions for about a year post-close. 

Similarly, what is HR’s role in building excitement for the deal?

As HR supports the employees straddling two companies, it also plays a critical role in generating excitement and positivity around the deal.

Seasoned practitioners agree genuine excitement cannot be built until employees’ basic needs are met.

Consequently, the above robust communication plan must be in place and, again, cover all of the foundational terms of the deal.

If employees see the goodwill of the buyer and know their financial lives will not drastically (and immediately) change, they may be less likely to take flight. 

How can both the buyer and employees involved in the deal be supported if the buyer’s infrastructure isn’t completely ready? 

There are common ways in which buyers might not be initially ready to provide full support for the new employees; one such area could be payroll. 

In such instances, the seller can greatly assist the buyer, thus supporting the deal itself and the employees. HR refers to these instances as “temporary bridges.”

More concretely, when the buyer’s infrastructure is not ready, HR can support everyone involved in the deal by setting up Transitional Services Agreements and/or Leasing Agreements.

TSA allows the seller to provide benefits to the employees being moved to the new enterprise (i.e., the seller provides payroll and benefits as a “service” to the buyer).

This allows the deal to progress forward, while also providing some breathing room for the buyer to set up payroll and benefits.

It should be noted that TSAs do not span longer than a year and are not allowed in all countries. Another option when a TSA is not viable is a Leasing Agreement (LA).

An LA would be appropriate when a deal is closing, but there are employees that don’t sit on a legal entity going to the buyer. This option allows employees to perform jobs and receive benefits from the seller.

Again, an LA would not last longer than a year. 

Another possibility if the buyer, especially if it is a smaller company, is not prepared on day 1 to address all new employee needs is a PEO.

PEO stands for Professional Employer Organization, which can provide tremendous value in the world of M&A as it can also be used when a smaller population of a company is in a remote location.

Overall, PEOs provide a wide range of services such as payroll, benefits, and HR-related services for companies to choose from. A key benefit of PEOs is that they offer a level of sophistication at a low out-of-pocket cost. 

Final thoughts

Human Resources straddles numerous functions during M&A, especially during divestitures and carve-outs.

Undoubtedly, its largest task is communication and using communication to ease employee anxiety, which will, in turn, protect the deal.

Satisfied employees are productive employees, and the asset being sold is only as strong and valuable as the employees behind it.

Fortunately, more M&A practitioners are realizing the vital role culture and employee satisfaction play in overall deal strategy, and, therefore, they are giving HR the recognition it deserves.

Continuing to develop, cultivate, and hone HR best practices has the potential to add incredible value to companies before, during, and after any M&A activity.

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