Intellectual property can simply walk out the door
An acquirer might like to consider what could be done do about protecting the intellectual property of any business purchased if, on average, forty percent of acquired senior executives leave within nine months and seventy percent are gone within four years. If you think that is a bit scary, consider that those statistics relate to large corporate mergers, my suspicion is that the rate of departures in small acquired firms is much higher.
Most large acquisitions involve senior executives who already work in large companies and probably receive little compensation from the acquisition event. Compare that to small acquisitions where senior management are likely to have an equity share and probably prefer to work in a senior role in a small firm. They are cashed up, looking for the next opportunity and like what they do. Your chances of losing senior management and key employees in a smaller acquisition can be expected to be much higher than the large M&A average.
You need a succession plan
Smart acquirers know this already. They also acknowledge that entrepreneurs and SME senior executives generally make poor subordinates and rarely fit into large corporate structures. They therefore anticipate significant losses of key staff and look to mitigating this outcome through proactive succession planning, short term retention bonuses and documentation of corporate knowledge.
Planning for such an eventuality comes well before the deal is done. Key employees are identified, those senior managers who need to be retained are targeted and the level of corporate documentation of internal processes is noted. From this review comes a decision on how the acquisition activity should be approached. Where the losses are expected to be high and knowledge is poorly documented, the target price falls steeply or the opportunity is bypassed. Where key employees and managers can be approached prior to the acquisition, with current owners agreement, strategies might be put in place to stem the tide of those intending to leave. However, lack of documentation is a problem and thus this becomes an urgent post-acquisition activity.
A broader view of IP would encompass customer and supplier relationships. These can suffer disruption and possible loss with the departure of key personnel. If the loyalty of the relationship is primarily with the person rather than the company then there is a serious risk if that key individual leaves. The acquirer needs to step in quickly after the purchase to establish a broader net of relationships with the business, especially with the new owner’s representatives, so that more time can be given to firming up good relationships with the on-going business.
Ensure you keep the key employees
Where the entrepreneur desires to stay on with the buyer, arrangements need to be put in place to move loyalties to the new owner. This might mean a change of responsibilities to a new area of the business, the formation of a wider senior management team or a board of directors and the implementation of deeper performance setting and review systems across key areas of the acquired business.
Retaining key employees and corporate knowledge has to be a key strategy of any acquisition activity.
