What to Expect After Closing a Private Equity Deal (Part 2)
Paul Wormley from Hadley Capital digs deeper into the specifics about what a business owner can expect to change upon closing a deal with a private equity partner in regards to employees, contracts and the addition of a board of directors.
In part one of this article series, I explained the changes you should expect upon closing a deal with a private equity firm, including changes associated in an asset versus a stock sale, changes forming a C Corporation from an S Corporation, changes in banking relationships and the time frame to expect for all of these items. Here, I will address the "changes" that impact employees and dig more into specifics about the changes to expect in order for you to be fully aware and, thus, fully prepared to close a private equity deal.
'Change' that Impacts Employees
Typically, the most concerning changes that business owners want to understand in a private equity transaction are those that may impact their employees. For good reason. Many of the business owners that we buy companies from view their employees as members of their family and they want to make sure they are looked after in the sale process. Our goal in any transaction is to minimize the impact on employees such that a seller can tell the employees that “All that will change is the name at the top of your paycheck.” We work hard to make this a reality: in nearly all cases, salaries and benefits remain the same, the location of the company remains the same, reporting relationships remain the same, etc. Over time, there are inevitably changes that impact employees, but these changes are typically driven by the management teams that are running the business, and are made for good business reasons, rather than being a result of the private equity transaction.
Assigning Contracts to 'Newco'
When Hadley Capital buys the assets and businesses of a target company, we form a new company, "Newco," to complete the acquisition. All target companies maintain contracts with customers, suppliers, vendors, partners, etc. that need to be assigned to Newco simultaneous to closing. This can be a very cumbersome process, particularly for a company that has a large number of supplier or customer contracts. We acquired a business several years ago that had more than 100 individual customer contracts in place at the time of closing. All of those contracts had to be assigned to Newco so it could execute the contracts, be paid, etc. That was a process that took the target company close to a month in order to make sure that all those things were in place and ready to go by closing.
Seeking contract assignments from customers before closing must be approached very cautiously. We work with the target company to determine the appropriate point in the process to begin approaching customers. Typically, this point is later in the process when we all have a good sense that the transaction is going to close. All of the assignments are contingent upon the transaction closing. If the transaction falls apart very late in the process - which is extremely rare - none of the assignments would take effect.
Then there are specific assignments that can take time even if it’s a single contract. For example, a real estate lease. If the target company leases its facilities from a landlord, typically, we will acquire an assignment of the real estate lease to Newco so it is the proper lessor. Sometimes, assignments can take quite a while to finalize because the landlord drags his/her feet. So, very early in our due diligence process, it’s important to identify the contracts that will require assignment and understand the amount of work that’s going to be required to finalize the assignments, or to enter into new contracts under Newco's name at closing.
The Addition of a Board of Directors
As I pointed out earlier, when we buy a business, the team that’s running the business continues to run the business after closing and they make the day-to-day operating decisions in the business. However, all of our companies have a board of directors that provides strategic support to the management team. This is typically new for most of our companies. The president of the business reports to the board, which customarily meets four times a year and is composed of a Hadley Capital partner, the president of the company and, usually, one outside board member. We find that, over time, our management teams appreciate the opportunity to have a check-in on how we’re doing against the goals that we set for ourselves at the beginning of the year. It’s not an extremely formal process when we meet, but it is an important part of how we govern the businesses and how we work together to keep the accountability that’s required to achieve our goals on a quarter-to-quarter or year-to-year basis.
In the third and final part of this article series I will discuss more changes to expect upon closing a private equity deal.