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Building Resilient Companies Using Human Capital and Risk Management Strategies

Brian Stovsky February 26, 2024
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Investors and portfolio companies, particularly acquisitive middle market and lower-middle market firms, have different challenges than in years past. Volatile market conditions, higher costs of debt and competitive acquisition markets have made management teams rethink their growth and retention strategies.  

In many cases, these strategies start and end with quality people.  

Manage, retain, attract top talent 

Workforce issues can derail a deal and hinder the growth of an organization. So why are human resources teams often overlooked during the deal process or when discussing strategic initiatives?  

Among other things, the strategy behind building a resilient mergers and acquisitions-oriented business starts with the hiring or retention of quality people and seasoned management teams. Resilient businesses require a management team that can lead during chaotic and challenging periods, align with company culture and motivate their workforce.  

There is no better time than now to review your current process around managing, retaining and attracting quality talent and discussing what a successful process looks like.  

Use a benefits and human resources advisory team 

In many instances, bootstrapped and family owned middle and lower-middle market companies have understaffed and inexperienced human resources teams, specifically regarding mergers and acquisitions.   

Private equity firms and their portfolio companies should lean on their advisors to perform many of the critical reviews and benchmarking analyses that are necessary. This will ensure that the compensation and benefits package they offer is competitive with their peers, based on size, industry and region.   

Services such as wage analyses, benchmarking of employee benefits and retirement plans, deferred compensation plans, key person life insurance, employee assistance programs and virtual advocacy tools are among the many things that today’s workforce expects.  

Additionally, when selecting a management team, consider their experience with acquisitions and how that can improve integration and workforce management processes.   

Protect your management team and the company  

Once the management team is in place, it is pertinent to protect the team by mitigating risks and liabilities that fiduciaries of the business can face. A comprehensive executive risk/management liability program should be in place to protect the leadership teams of a company from personal liability caused by a professional decision or action. These programs traditionally include directors & officers (D&O) liability, employment practices liability (EPL), fiduciary liability and crime coverages.  

Further, errors and omissions policies (professional liability) can protect companies from legal fees in the event of a lawsuit claiming that a business was negligent, made a mistake or performed inadequate work. Such policies help create a resilient business over time.   

Properly perform due diligence on a target  

Another key part of building a successful portfolio company is to compile a great core due diligence team surrounding potential add-on acquisitions.  

Accurately assess the inherited costs of the target, identify any synergies between platform and add-on and calculate future costs caused by the integration. Human capital strategy, employee benefits plans, retirement and defined benefit plans, executive benefits and buy/sell policies, and commercial insurance program reviews should all be considered during due diligence.  

Protect buyers and sellers through Representations and Warranties insurance  

Build a resilient business by protecting the organization from material misstatements or breaches of the purchase agreement post-closing through Representations and Warranties Insurance (RWI).  

Traditionally, RWI protects a buyer from any breaches in seller representations as reflected in the purchase agreement. The policy will cover indemnity from seller breaches of the contract. Limits are often set at 10%-15% of enterprise value, deductibles (retention) are typically .6%-.9% of enterprise value, and premiums generally range from 2.4%-2.7% of policy limits. Retention is often split 50/50 between buyer and seller, however we are seeing more deals structured with little to no seller indemnity in the RWI policy.  

The placement of RWI has become a widely adopted practice in private equity transactions. It is a unique advantage to have a benefits and risk advisor that can also place RWI, as the RWI advisor will have a direct line of sight into the due diligence that drives the RWI underwriting and consideration of exclusions to the policy.   

For divestitures in the lower-middle market, there is sell-side Representations and Warranties insurance, limiting the liability of the seller post-closing. This provides coverage for defense costs that may arise from the claim of breaches asserted by the buyer or a third party and can provide up to a specified percentage of the enterprise value to pay indemnity to the buyer if there is a breach. 

Brian Stovsky is the Business Development Leader of Oswald Companies. Contact him at 216-970-8622 or bstovsky@oswaldcompanies.com. 

This article initially appeared in Crain’s Cleveland Business.