Employee issues are the fourth key area of IT due diligence.
You need to determine a number of things based on limited information and time. Who are the key people that you need to maintain after the deal? Are they flight risks? I’ve seen many times that people get nervous when a deal is announced. They assume it means they’ll be losing their job and they start looking for a new one. Or, they feel that their employment environment is going to be changing anyway, so they might as well explore all of their options.
If you’re able to identify key employees at TargetCo, AcquiringCo may want to consider offering employment agreements or retention bonuses to ensure that these individuals are going to stick around at least long enough for AcquiringCo to get its arms around the business.
Especially in technology companies, the staff can be very attached to their way of doing things, so it’s very important to understand a number of cultural issues that impact employees. Otherwise, you may find that you’ve just acquired a company where every key employee will be gone in six months.
Many small companies take on the personalities of their strongest employees. If you’re buying a startup where the mentality is to come up with an idea for a cool new feature, work 24/7 to develop it and then roll it out to see what the customers think, it won’t take too many times for those employees to run into red tape or other roadblocks at AcquiringCo before they figure out that AcquiringCo isn’t for them.
In most startup IT companies, the overriding goal is to get the product to market ASAP. To achieve this goal, things like well-commented code, backups and system documentation can go out the window. Other formalities at AcquiringCo such as product management, system analysts and QA may also come as a shock to TargetCo’s employees. If AcquiringCo is an established organization with strict processes in place for its operations, you can count on employees of TargetCo seeing these as nothing but needless bureaucracy.
Companies can have wildly divergent hiring strategies. Some companies may prefer fewer, expert employees and others hire an army of lower level staff, hoping to find diamonds in the rough. If you’re acquiring a company with the latter mentality, be aware that there can be a lot of turnover on the way to a stable workforce, so HR and recruiting resources need to be considered.
On the other hand, if you are that company with many less-experienced employees and you’re acquiring a company with a handful of industry visionaries, be aware that they may very well be unhappy in an environment where they aren’t challenged and inspired by their peers.
There are many established software development methodologies, and software developers can become quite attached to their chosen method, sometimes almost to the point of evangelism. If this is the case at TargetCo, and AcquiringCo enforces a different approach, this can be a sure path to tension.
Tech employees can be very sensitive to their physical working environment. Their jobs often require a lot of concentration, and certain companies provide individual offices to most or all of their tech staff. If you’re buying such a company and plan to make room for more employees by moving everyone to new office space with cubicles, you need to understand that to some employees that could be as bad as telling them they can expect a 50% reduction in pay.
You need to be sure these issues are mentioned in the due diligence report. In my opinion, the job of the person performing IT due diligence is to identify any issues that can impact the success of the transaction, not simply the quality of the source code and age of the servers. In severe cases, the cultural differences may be significant enough to abandon the deal.
Also, when there are real cultural concerns that may cause you to lose key TargetCo employees after the deal closes, it’s even more advisable to lock up those individuals with employment contracts or other incentives as I mentioned earlier. In addition to keeping the key members of the TargetCo staff around, if they’re happy they can become cheerleaders for AcquiringCo and this can help retain the rest of the staff.
I’ve developed a few strategies for dealing with employee interviews in technology companies. It’s best to ask open ended questions.
Some questions I like to use are:
- Who are the people who are critical to the operation? (ask more than one person)
- Are there any bottlenecks in the code or website?
- What would you change or improve if you could?
- What do you think of the technology used here at TargetCo?
- What would you want to know if you were me?
You might be shocked at what people are willing to tell you.
Also, I like to meet with employees in their office and at their desk, often sitting next to them as they demo products or explain what they do, I find that it’s a much less intimidating environment than sitting across from a conference room table in what probably feels like an interview. The more comfortable they are, the more likely they are to provide useful information.
Any one of the issues identified in this series of articles, if serious enough, can be a reason to walk away from a transaction. In many cases, though, they can be addressed before or after the deal closes. The key is making sure you identify the problems ahead of time so TargetCo pays, one way or another, and not AcquiringCo.