The Importance of Employee Voice and Due Diligence in Distressed M&A

Distressed asset M&A can be a complex and risky process; it can also present significant opportunities for companies who are able to successfully navigate the challenges.

What are distressed asset mergers and acquisitions (M&As)?

When a company or asset experiences financial difficulties like bankruptcy, debt, or operational problems, it is considered “distressed.” Distressed asset mergers and acquisitions (M&A) occur when another company acquires or merges with the distressed company.

Why would a stable company want to take on a risk like this? Acquiring valuable assets or intellectual property at a discounted price is an attractive incentive, as well as the opportunity to improve the operations and financial performance of the distressed company.

As enticing as it may seem, challenges such as identifying and valuing the distressed asset, negotiating the terms of the acquisition or merger, and managing the integration of the distressed asset into the acquiring company must be carefully considered along with a well-thought-out plan to address them.

Take the time for a thorough due diligence review

Due diligence is an important step in the process of acquiring a distressed asset. By reviewing and evaluating the financial, legal, and operational aspects of the asset the acquiring company can ensure the acquisition is viable and in their best interests.

Several critical due diligence focus areas should be considered in distressed asset purchases. Some of these include:

1. Financial viability: Carefully analyze the financial performance and condition of the distressed asset. This includes evaluating the asset's financial statements, cash flow, and debt levels to understand its financial stability and potential risks.
2. Legal issues: Contracts, litigation, regulatory compliance, and other legal issues should be examined with care.
3. Operational performance: Assess the operational performance of the distressed asset, including its capacity, efficiency, and quality of goods or services.
4. Intellectual property: An audit of intellectual property owned or used by the distressed asset, including patents, trademarks, and copyrights should be conducted.
5. Environmental and social impacts: Consider the environmental and social impacts of the distressed asset, including any potential liabilities or risks.
6. Management and organizational structure: Evaluate the management team and organizational structure of the distressed asset to understand the strengths and weaknesses of the asset.
7. People and culture: This often-overlooked component of the diligence process provides insight into the employee experience (Ex), culture, leadership capabilities, value creation opportunities, business continuity and compliance risks, and blind-spots in a prospective deal.

When your most valuable assets are escorted from the property

Distressed asset deals can move at a lightning pace often because cash-flow is tight or non-existent — funding sources have dried up, lending covenants have been broken or there is some other critical business continuity issue and operations will cease without an infusion of capital.

All the more reason to capture the voices of employees in the process. A recent client engagement of ours illustrates this point beautifully:

Forty-eight hours before closing, a new client reached out for assistance with notifying employees of facilities closures and layoffs related to their acquisition of a distressed asset. The target company was a friendly competitor, with strong community presence and a loyal employee base. As key players in a niche industry, both the buyer and seller shared many of the same vendors and customers.

We rapidly designed employee-facing communications and were on-site as client representatives to provide notice to employees whose positions were being eliminated — a difficult task, at best. One facility was scheduled to close entirely. Despite our recommendations to the contrary, employees were not provided advance notice of the visit and were notified of the loss of their jobs in the morning then asked to vacate the premises by lunch time.

As we walked the facility to answer questions, provide assistance and ensure employees were safe and cared for as they exited, we noticed a gentleman packing a pallet of cartons. When asked, he told us the boxes contained completed customer orders for FedEx pick up at 3PM (after the building was to be closed). He then shared that there was outstanding work-in-progress (WIP) valued at more than $50k, with a margin in excess of 80% which would go unfinished. They were also expecting to receive an order of approximately $40k in raw materials, some of which was intended to pass-through to customers at a margin of 50%. The same customers both parties counted as strategic accounts!

The seller’s business had been running so lean that there were no redundant operations or business continuity plan. The production capabilities in this, now closed facility, were unique to both buyer and seller. No one was left to manufacture, ship or receive products. All the necessary operators and skilled production staff had just been escorted off the property.

The diligence process neglected to capture the knowledge, understanding, expertise or commitments of this team. We asked if any member of this work unit had been included in the diligence process. Two members of the site management team received e-mail requests for data and specific documents just as diligence commenced; that was all.

Employee voice – because there is so much at stake

A critical stakeholder group in any company, employees — their voice and experience are invaluable in distressed asset deals. As we’ve seen, they are the ones who are responsible for the day-to-day operations of the company and play a key role in its success or failure.

Some 70-90% of deals fail to achieve their intended objectives, often attributed to issues of people and culture. In this case, even before the deal closed blind-spots emerged. Had the diligence process factored in the knowledge and expertise of the local team, costly mistakes resulting in customer dissatisfaction, lost revenue, excess shipping and restocking fees and expensive rehire or contract employment costs might all have been avoided. One could argue that in the case of a distressed asset purchase this kind of diligence is even more important than in a typical deal – there is more at stake.

Caring for the most valuable asset in distressed asset deals

In distressed asset deals, the employee experience is unique and should be addressed with a dose of compassion. They may be concerned about job security, changes to their work environment, or the impact on their work processes and responsibilities. An employee-focused communication approach that addresses the perspectives and needs of employees during the M&A process can ensure a smooth transition and minimize business disruption.

A few simple steps can uncover a myriad of valuable information and ensure the employee voice is heard.

1. Communicate, communicate, communicate: Early and often. Keep employees informed about the ongoing M&A process with frequent touchpoints.
2. Consult with employee representatives: Better understand employee concerns and needs by talking to managers, front-line supervisors, union leaders or employee committees.
3. Solicit input: Give employees an opportunity to be heard. Findings from surveys and focus groups can bring underlying issues and concerns to light

Often overlooked or undervalued, employee voice and experience can help build trust, surface areas of business opportunity and risk, and lay the foundation for a successful acquisition or merger.

Overall, making a distressed asset investment can present significant opportunities for companies that are able to navigate the challenges and risks involved. Engage in a thorough, even if faster-paced diligence process that includes human capital and have a well-thought-out plan in place to address both pre- and post-closing items. If you’re in need of expert resources to help you navigate this process, seek out a resource. 29Bison would be happy to be your guide.  

Please help us spread the word! Share this post with others who might find it helpful.