Post-Merger Integration: The Key to Long-term Success

This episode dives deep into the often-overlooked phase of post-merger integration. Discover why a smooth transition is crucial for the success of any acquisition and how to align the operations of two merging companies effectively. Learn practical strategies for retaining top talent, navigating the challenges of change, and ensuring a positive experience for both employees and customers.

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TRANSCRIPT:

Welcome to Integrated Insights with ICCG. For more than 30 years, our team has partnered with small business owners to prepare for and navigate the business transaction process.

Pull up a chair as we share stories and insights from our experience on all sides of the M &A table. All right, welcome back for another episode. My name is Michael Hefner.

I'll be your host today. And I am back with the founders of ICCG, Grant McQuilkin and Dave Parker. Hey guys. Hey, how are you, Michael? Good doing well. Today,

we're going to be talking about post merger integration. So after the merger, after the acquisition, everything's not done, right? There's still the transition phase. So first,

I want to talk Now, what steps can be taken to align the operational process of two merging companies? Okay. Before Grant answers that question,

because there's a lot, actually, I think we both have a lot to say, but I want to address why you're even asking us this question, because we know,

just from experience, that there are a lot of intermediaries or brokers or whatever you want to call them,

that once they get the initial agreement signed, although I signed, they're kind of handing it off to attorneys and they don't have any clue, they don't care, yeah,

it's hands off as far as, you know, transition. So I appreciate you asking us that question because we, as a lot of other intermediaries we've met that deal with the businesses like in similar businesses like we do are in the weeds on the transition.

That's one thing we tell the business owners from the beginning. Our fee doesn't stop. Just our fee, we're going to help you script as much as we can the transition. We can't do it for you.

We can't walk in and be the people. Although we have sat on some of those meetings, but you know, we're not going to keep holding hands weeks afterwards. But there are some things that happen operationally that will make a transition a lot smoother.

Because what we care about are two happy parties, well three happy parties, we like to be happy too, but we like for buyer and seller to be happy. And we want to be a win -win, right? And so that's why that's such an important question,

so Michael, so thank you for asking it. Now, Grant, you can just jump in and answer the whole question. I'll jump in if I can. Yeah, you know, there's a lot of new,

you know, you dive in, you've just bought the company, you dive in, and you're just looking at a lot of you trying to learn as much as you possibly can. There's a desire to change immediately without getting to know everything and that's a mistake.

Everybody knows that but you want to make a difference as quickly as possible. There's a lot of new for the employees that their company just got bought.

They get in to know you. They're getting new benefit plans. A lot of times they're getting all those kinds of changes which is really,

really hard. And so everybody, you know, is tense. Sometimes, you know, because of the rumor mill, everybody's in survival mode,

trying to, you know, figure out whether they're gonna have a job, whether the job's gonna change. How's my life gonna be different? And so you're,

you know, as a buyer, you're walking into an environment that is hopefully not going to stay that way. But it's difficult. There's lots of feelings,

right? And so I know I get teased that I don't know what that means. But there's a lot of feeling going on. And You've been working on your feeling words,

Grant. It's okay. You know, maybe next time we do this, we'll get a feelings wheel. Should we illustrate that for everybody? Could you tell us what you're feeling right now? We kind of illustrate that for our listeners.

That's right. My wife is firm that I don't know what feelings are. Yeah. And so, you know, you can't just take two companies and smash them together and say,

get along, you know? You know, If you do that, it comes with a ton of risk and it is done. You know, there's a lot of people who just go out like people who roll up a whole bunch of,

for example, home services businesses, you know, they just buy and buy and buy and buy them and they say, "Here's your new logo. Here's your new contracts. Let's go. Let's go. Let's go. Here's your new pricing model." And I got to be honest with you,

sometimes it works. But it's not without a whole lot of collateral damage. And, and so, you know, developing a plan and a combined leadership team that is,

you know, all for one one for all going to going to ride for the right brand. All of that is, It just takes leadership skills, not just a skilled purchaser of businesses.

You have to go in there and lead or you have to hire somebody that's capable of going in there and leading. And so, you know, sometimes it takes time or it takes resources.

It just depends on which method you pick. - You talked about all the changes that the employees are gonna encounter, and then you also talked about having the right leaders in play. How can those leaders and other decision makers retain or identify and retain top talent in the transition?

- Yeah, that's really important. And I think part of that has to do with when a business owner reads them into what's going on. In other words,

lets them into the circle. A lot of business owners, and I understand why, we totally understand why, want to keep everything quiet till the very last minute, and that works to a point,

but it can be so earth -shattering when they walk in and one day that they've been sold, it can be so earth -shattering that they lose everybody, right? And so I think probably the most successful ones we've seen are when that business owner gets those key employees that he knows are super important for the retention of the business to come on board and reads them in early and allows us to work with them.

In fact, oftentimes they are the ones who are producing a lot of the due diligence information, which then they're learning about the buyer in the process. They're included in the buyer, they're included in the buyer meetings and things like that.

So I think getting them early on, getting them exposure to the buyers, getting them, you know, helping the buyers understand who these, who these folks are that are really running the business.

Normally, I would say, I don't know, Grant, probably, I would say 75 % of the time, when a business is, the types of businesses we deal with, A lot of them are run by founding owners.

By the time they're ready to sell, they've normally got a couple of people that are really running the business for them. They're not calling the shots every day, so getting them involved in that process,

perhaps encouraging the owner to get some equity into their hands before they even put it on the market can be a huge benefit for retention, especially if they're rolling equity into the new platform company,

if that's what it's going to be. Yes, and sometimes that can be vested over time, you know, where they get, you know,

almost a deferred bonus plan as long as they stay around, right? If they're critical to the business, I would say the other mistake buyers make when they go in and buy businesses is,

you know, particularly if they're buying a founder led business, typically the A type baby boomer, it's my way or the highway.

And so there's a level of frustration amongst the junior management team that They don't ever, their suggestions are not necessarily listened to and so a buyer can come in and really make his job easier by listening to some of those suggestions.

So sitting down with those management team and just say, "Hey, okay, if you were boss, if you were in my position, what would you do, you know,

that is different than what you're doing today? And so giving a voice to those particular people who generally have been told, No,

you're going to do it my way. For many years, gives a gives a lot of, you know, runway with those people. I think I think you also get some really good ideas out of it.

And some of them you're not going to follow, but you retain people because they think they're making a difference. You're going to pay them similar compensation,

if not more. You can always play with the compensation. But compensation adjustments are only as good as your competition and not willing to match it,

right? You know, people really want to feel like they are contributing, like they are appreciated. And none of that's new.

But when you're buying a company, because of the quote, unquote, "feelings" that we've talked about, it's good to make sure that those employees that are staying,

that you want to keep feel valued. - Makes me think about when I was a manager in big box retail and one of the best things that I heard from as a strategy for new managers was coming into the store and going around and talking to every employee and saying,

hey, what can the store do differently? What can make this store better? And then they gave themselves a deadline for everything that made sense to change and gave themselves a deadline to go make those things happen and bring those people in as part of it,

right? And they get a lot of buy -in that way. So that's great. That's a really great way. Can I add one thing to the retention? For buyers coming in and dealing with top talent is I think the question was in retaining the top talent.

I would say one of the key things is just to be brutally honest. What you don't want to do is come in and bait them to stick around when you're planning on canning them. And I think that just, I think coming in,

in fact, we always tell buyers, don't come in into diligence or anything telling a bunch of lies to cover up what's really going on. Let's figure out the honest way to do it, because once you tell one lie,

you're always going to be known as a liar. So, you know, when you're dealing with a top talent, if they're on edge and they've they've got a performance that they've got to meet, you've got to be really direct because they don't want to get into a situation either where they're going to be strung out there and all of a sudden that happened to me.

When I saw my first business, I thought I was going to be running the whole area and I was dumb enough. I didn't know how to protect myself. I didn't think about it. I was trusted these guys and I was canned and I was like,

well, wait in it. What I didn't know is they had been talking to all my managers behind my back and just said, "Well, they can handle this without the top guy." Okay.

I'm happy to say that company's not around today, but... [laughter] I'm sorry. That's not like an arrogant...

Yeah, well, okay. Nothing like It tastes good, doesn't it? That's a long, long involved story. You know, what's funny about that? I learned more,

I think Grant, because Grant, is this first, when Grant and I had known each other for about a year or so, and we were both involved. He helped me as my CPA before we were business partners do this transaction.

I think we learned more about, we learned more about what not to do out of that transaction. We went for everything from that, how to protect people. So I think a lot of what we do with our,

with our sellers comes out of our own mistakes in our own business dealings. And those are some of the most valuable lessons you'll ever, ever get. No book can teach you.

But, you know, do it once to me and I'll make sure that it doesn't happen to anybody else. Yeah. Yeah. Also, just want to recognize the fact, Dave, what you said about bringing in your people,

it can kind of sound counterintuitive to a lot of business owners. Because one, I mean, they're like, "Hey, I'm on my way out. Why would I put in that extra effort?" You know, it's not, you know, the sales price is the sales price, all those things. But I think business owners that are considering bringing their business,

they just got to think through if they were on the other side of the table, and they're seeing all these key players that they're going to get to work with after the after the transaction is through being part of that process and just getting to interact with them and kind of see the value they're going to bring on the front side,

like that's going to bring value, if nothing else that's going to secure the deal and help it to go more smoothly, but can even add value to the business. Right. And one of our, so we've been by side on some deals here in the last couple years and one of them In a space which i won't miss mention but you know we were led believe several things from the seller and i tell you what i got to closing a week after

closing and it was it was anything but what they said. And and so i mean sellers so there's a there's a piece of and there's a and i think what you just said basically michael is you have integrity when you sell your business.

Be willing to stick through the transition and do what you say you're gonna do and don't minster words and don't be deceptive and because that never turns out well and that person's name is still a joke around our buyer's company.

And everything that's being done now on future transactions is much of it's being done and protected because of what happened there. Once again,

fool me once, but next time, there won't So I think I think, you know, maybe there's a pattern there Dave that we could make a rule out of and that is people that are like our like our typical client are founding You know people that have run own the business for 38 years,

you know, for example They they seem to understand legacy a little bit differently than the people that have to own the business for two,

three, four years. The guys that have run a business, own a business for two, three, four years and they're selling their business, you know, they're not thinking the business is their legacy.

And so the way they care for people in the business as well as care about the buyer being successful after they sell the business is very unfortunately predictable.

And so if you're buying a business from somebody who hasn't run it for a long time, hasn't got a whole lot of relationships with the current employees,

you're going to have to mitigate that risk. Right, so it's a great point. That's great. So we talked a lot about the transition of employees, but someone else that might be affected or the customers in the business.

So it may not be as great, but still needs to be considered. So what are some ways that the new business owners can ensure a smooth transition regarding the customers? - Really,

it's industry specific, Michael. That's a kind of a really broad question. I think overall, when you deal with a smaller business, let's say, you know,

sub -20 million dollars. You know, they've got a lot of personal relationships with often times with customers and everything. And that's sometimes they become really guarded about that and thinking that really,

oh, I don't know what they're gonna do because you know, I'm probably the only one who can really fulfill this. And what we find out in most cases is once we get a new buyer in front of the customers at some point or whatever,

it all works out. 'Cause really, I mean, not to be brutal or anything, but what a customer really wants is the product, you know, or the service, right? And so as long as they continue to get the product or the service,

they'll get over the fact they're not dealing with their best friend anymore. And that's sometimes, again, again, there's a psychology there. You have to kind of walk through with both buyers and sellers.

and buyers will understand that and they won't push the envelope and they'll, one of the things we often do is have the, we want the, especially if it's like a founding owner to stick around and make those introductions themselves,

you know, write that letter of introduction or literally sit down and with these people and introduce them and talk about how great it's going to be and kind of script that, script that message for them. We've done that quite a bit,

haven't we Grant? Yeah, for sure. And, And I would say it's particularly difficult when you have, you know, customers that have dealt with the owner and now all of a sudden they're dealing with the sales department.

It's, you know, and they got a call and be on hold for 30 minutes where they knew where they had the cell phone number of the owner in the previous regime. So, you know,

buyers are smart. They mitigate that risk by by having an earn -out. Look if sales dip below this amount and then the sales price goes down or if,

you know, and we always try to negotiate a little bit of upside and make it worth the for the seller to stick around to transfer those relationships and say hey if the sales go up,

then I need a little bit more for my time. So I think it's difficult, and it takes what we say,

it takes internal and external selling. So if you sell your employees on the value of the merging of the companies,

then they will typically sell the customer on it. And you just got to work hard on both the internal and external selling.

You can tell your customer all you want, but if your employee is unhappy with the merger, then they're going to look for an opportunity to leave. You have to understand, anytime there is a change,

it's an excuse for your customer to look elsewhere. And So you have to give them constantly a great case to stay with the company.

- That's a good point. I like that sell internally before you sell externally. Looks good. - Well, that is all the time that we have today. But Grant,

Dave, thanks for joining me again for this episode. - You're welcome. Thanks, Michael. - And that wraps up another episode of Integrated Insights with ICCG. Be sure to subscribe and stay tuned for more stories from our team.

We love hearing from our listeners. If you have any questions or topics you'd like us to cover, please send us an email in the show notes. For more information about ICCG,

please check us out on our website or follow us on LinkedIn and YouTube. Until next time, there's is a seat at our table.