Exit Preparedness from an HR Perspective

Photo by Paul Bence on Unsplash

Imagine the following scenario…

Healthchx* was founded by two physicians driven to modernize the healthcare sector. Fast forward, five years later the company has grown to a team of 150+ employees comprised of full-time staff, based out of headquarters in Toronto and other locations across the US and Canada, with a large base of independent physicians and nurses. The decision to move forward with a potential acquisition has been emotional. It’s taken several years of hard work, external investment, pivoting the business, and scaling the team to exceed targets and business outcomes, and now they’re a leader in the marketplace.

There have been multiple acquirers knocking on the door over the past six months, each undertaking an extensive due diligence process. For the most part, the financials were in order, but the HR documentation and processes were a mess! Information gaps in employee records and performance were rampant. There were also messy databases, undocumented HR policies and practices, outdated cap tables, and key HR metrics were non-existent. Critical HR inquiries were going unanswered or responses were mainly anecdotal.

The focus over the years had primarily been on product development, customer acquisition and growing the team (which they did well), while the HR team had to adapt to an ever-evolving operating environment and addressing immediate employee / operational priorities. The challenges unfolding from the due diligence process added undue stress during an already difficult and uncertain period for the passionate founders. Here are some thoughts on how this team could have prepared for this moment — possibly adding to Healthchx’s valuation and reducing the burden on the team.

*Note: The above company and scenario and company is fictional in nature and only used as an example of a possible outcome of a merger & acquisition.

This scenario may sound familiar to those who’ve led a merger or acquisition (M&A) process or been affected by it while working at a startup or established company. In the early days of building a business, most founders are primarily focused on immediate or short term priorities (i.e., scaling the team and product) to help position their companies as leaders in the marketplace, while being less concerned about possible exit outcomes.

However, in order to scale a successful business, it’s critical that sound HR practices be integrated from the beginning into every step of the process. Outlined below are some strategic and tactical HR measures leaders can take, in partnership with their People teams, to help ensure that key stakeholders experience a smooth and successful transition upon an exit.

Talent Acquisition and Compensation

Building a great business begins with hiring the best team. This process has many steps, but generally includes identifying gaps and talent planning, establishing consistent processes, and having key metrics and data in place to drive sound decision making. However, there are some general considerations to keep in mind.

a) Hiring ‘A’ players should be the goal of every manager. All egos aside, managers should encompass the courage and commitment to hire those that are ‘smarter’ than them with the right talent to help fill key gaps. This will help foster a culture of continuous learning and innovation, and help attract and retain talent in the company. It also makes the company more valuable when potential buyers are assessing talent during the due diligence process.

b) Recruiting “smarter” individuals, doesn’t mean overlooking other personality characteristics (e.g., narcissism) which may make that individual a poor culture fit. Toxic employees can have a detrimental impact on your company and culture and lead to disharmony among employees, higher levels of attrition, and cultivate a negative atmosphere in the workplace. This HBR study indicates that the cost of hiring a toxic employee outweighs the benefits of hiring two superstars (defined as top 1% of workforce).

c) Invest in your employees! If you’re planning to keep your compensation levels below industry standards, you may want to reconsider. Todd Simpson, Venture Partner at Inovia, shares his perspectives on this topic as it relates to Canadian startups.

• Concerns about cash burn or preferences to channel resources primarily to immediate priorities (e.g., optimizing product) may seem as a sensible approach in the short term. However, if this is not rebalanced in a timely period, it could result in difficult scenarios and costly future investments in the long run. This could entail declining employee loyalty and potentially increase attrition levels down the road.
• It may also prevent you from reaching your ultimate goal of creating a successful business or add unanticipated complexities and challenges during an M&A process. Buyers will definitely pro-forma proper salaries and as a result the company may have to adjust profit figures to provide a more accurate depiction of salary/compensation costs aligned with industry benchmarks.

HR Actions:

• Provide expertise on best practices as they relate to hiring and compensation to ensure your leadership team is making the right decisions by hiring top talent and competitively compensating employees.
• Frequently monitor and manage recruiting channels such as Glassdoor and LinkedIn to create brand awareness and address employee feedback in a timely manner.
• Offer guidance on setting and updating the compensation and equity strategy for your company. If you’re a startup or private company looking to benchmark salaries, Advanced HR may be the right platform for your needs. You can also explore other similar tools such as PayScale, Glassdoor or AngeLlist in cases where those may be better suited to your needs.
• Establish clear change in control provisions to determine whether equity previously granted to executives would be fully accelerated if there was a change in control in the company. This would include discussing whether full acceleration would occur when there is a single trigger or double trigger upon a change in control.

HR Onboarding, Systems and Policies

When onboarding new hires into your company invest the appropriate time and resources to ensure this process is done correctly. This may appear to seem relatively straightforward, but it’s important to emphasize as it can quickly become an HR nightmare if good practices are not established from the beginning. It also ensures that the employee has a positive overall onboarding experience and that relevant documents are appropriately completed, signed and accessible for future reference — which can be particularly useful during an M&A process.

Relevant documents can include:

• Employment Contracts (incorporate Intellectual Property clauses);
• Compensation and Bonus Plans;
• Stock Option Agreements + Vesting Schedules;
• Confidentiality, Non-Compete Agreements;
• Non-Disclosure Agreements;
• Performance Review Process;
• Employee Handbook and Policies

If the company does not yet have an employee handbook, it’s recommended that a Code of Conduct and Anti-Harassment policy be implemented, shared and acknowledged by all employees. This sets the tone of corporate values from top management and helps to avoid any possible legal ramifications. Here’s a great example of one written by the CEO of SuccessFactors.

It’s also normal to keep things lean in the early days of operating a company. One such example is managing HR information (i.e., employee data, vacation requests, performance reviews) using Google or Excel sheets. As you scale, it’s important to move away from these tools and adopt more robust HR systems to store and manage this data. This provides ease of access if asked to retrieve specific employee information during a due diligence process.

HR Actions:

• Ensure that minimum policies are in place and that all employment contracts, agreements and policies are regularly reviewed and updated as needed.
• Review all employee documents for completion and ensure accessibility by providing restricted access to your HR team or CEO/Founders through a shared folder or store within your Human Resource Information System (HRIS) platform (if you have one). Investing in HR management / information systems would be a wise decision as headcount grows.
• Remain compliant with all relevant federal, provincial/state, and local employment and labour laws:
• If you’re based in Canada, review your respective provincial Employment Standards Act (i.e., Ontario) and Federal Labour Standards. Some examples of employment laws or requirements include: i) Forming a Health and Safety committee if you have more than 20 employees in the workplace [Canada]; ii) Implementing relevant policies and programs as required by Bill 168 [Ontario]; iii) Ensuring AODA Compliance [Ontario]
• If you’re based in the US, review the federal laws and regulations set out by the Department of Labor. You can also visit the Society of Human Resource Management’s website for the most relevant State and Local employment law updates (note: you need to sign-in, be a member).

Employee Feedback, Retention and Culture

Having a culture of open and regular feedback is essential to making improvements within the workplace, especially as you scale, and is also key to employee retention. Implement regular “pulse checks” in addition to conducting more comprehensive employee satisfaction surveys. Summary of findings and feedback, along with appropriate actions being taken should be regularly communicated to employees.

These can also be useful data points to reference as potential buyers would likely want to evaluate workplace culture and trends to decide whether they’d like to move forward with the transaction. In addition, the data points can also provide a snapshot of whether cultures are aligned to facilitate a smooth integration upon an acquisition.

HR Actions:

• Carry out employee surveys and pulse checks. Review findings to identify and address potential red flags. Evaluate the impact of new measures which have been established based on employee feedback and recommendations.
• Review and leverage exit interviews to determine trends in data in order to address any gaps or systemic issues as a reason for departure (i.e., compensation, toxic managers).

Due Diligence Process

If and when you reach the stage where you’re actively seeking an exit or your company is approached for a possible M&A opportunity, that’ll likely kick off the due diligence process. This would entail an assessment of key business areas and operations to obtain a snapshot of company performance and identify possible risks and opportunities that may be incurred a result of the acquisition.

On the HR front, information requested can include, but isn’t limited to:

• Employment Agreements;
• Compensation, Bonus Plans & Stock Option Agreements;
• Benefit Plans;
• Vacation, Sick Leave;
• Organizational Charts;
• Employee Legal Disputes;
• Severance, Termination Agreements;
• Insurance Policies;
• Employee Handbook and Policies;
• Employee Attrition;
• Employee Performance Reviews

Potential buyers will likely also want to review and assess current team and individual performance to determine how to proceed post-acquisition. This is where you’ll have to work closely (and confidentially) with your HR leadership to ensure that information is provided in a timely manner.

HR Actions:

• Compile and share key and relevant documents for review. Note: If documents have previously been reviewed for completion and filed, the process should be relatively straightforward.
• Be well informed about the data provided and available to directly address questions from prospective buyer(s).
• Ensure confidentiality is maintained throughout this process in order to avoid any potential ramifications for stakeholders (i.e., management, employees, buyers, investors, etc.)

M&A Event

In the case of a possible M&A event, it’s critical to have a comprehensive communication plan in place and be transparent with your employees to ensure a smooth transition.

In some instances, this may involve a two-step communication process:

i) Initially, the executive team would be informed after the due diligence process has been completed and a merger or acquisition is imminent.

ii) This would be followed by a broad message to all employees just before the deal closes or shortly after it’s been closed. The timing of the announcement depends on the need to complete relevant closing documents (e.g., stock option buyouts), which would require employee sign-off, just before the transaction is complete.

Given the sensitivity of the process and the possible outcomes that could occur, it is especially important to carefully maneuver the communication process and understand potential implications on employees should the transaction not proceed as expected.

Leadership should encourage employees to ask questions and do their best to alleviate any concerns. It’s also essential that employee morale and retention levels should not be affected as this could adversely influence the ability to achieve post-acquisition business goals, which are part of the agreed upon transaction. The buyer will generally work closely with the leadership to develop a transition plan for employees.

HR Actions:

• Review the communication strategy and discuss potential organizational impact with the management team. Also ensure messaging is consistent between and across levels and appropriately disseminated to all employees.
• Discuss and evaluate the potential impact of executing option agreements, bonuses contracts (i.e., accelerated vesting) with both parties to ensure full transparency and avoid any potential compromises on the impending transaction.
• Oversee the integration process of employees that have been asked to remain in their roles or move into different positions.

The set of recommendations outlined above can offer early to mid-stage companies with an arsenal of HR tools and insights that can help support informed decision-making for attracting, retaining and supporting top talent in their respective companies. An inspired, satisfied and motivated workforce can play a pivotal role in helping companies drive outstanding results and deliver performance that exceeds the targets and expectations of key stakeholders.

The implementation of these HR measures can also enable startups to be well prepared and positioned for successful exits and ensure a smooth transition to the acquiring company. The case of Healthchx provides an example of how a company could have benefited from the implementation of these recommendations from the beginning. As a result, its founders would have been able to more easily and effectively navigate the due diligence process, resulting in a smoother and possibly more ‘healthy’ exit for all stakeholders involved!