A familiar story of due diligence


This article could also be called A Familial Story. I am talking about the tremendous opportunity we all have to ensure that Canadian entrepreneurs, past, present and future; derive appropriate value from their mergers & acquisitions activities as they strive to grow. Yes, this relates to the same: ‘Was the transaction actually accretive down the road?’ numbers we all get beat up on in every credible study done over the past twenty years or more.

The numbers and the legalese are usually well taken care of by a host of capable folks, many of whom I count as friends. The real problem, and where I see more sheepish expressions on the faces of otherwise very capable advisors than in any other area of due diligence, is when we get to the people component.

As none other than Bill Gates said recently at a conference in Texas, “In the long run, your human capital is your main base of competition.” The people component of M&A, particularly related to the due diligence process, typically makes a great many assumptions in this area. This helps get deals done.

The problem is, for the acquirer in particular, these assumptions are often seriously flawed. The reason they are flawed is that they are being made by people who are not trained, do not have the appropriate background, experience or tools to look past the ‘lipstick on the pig’. This often leads to lacklustre results, if not outright disaster for the acquirer. The M&A trail is littered with deals that looked great, but have not passed the test of time as well as everyone would have liked.

These outcomes are fundamentally problematic for everyone involved. Sure, the advisors get paid, that’s a given. The problem is that nobody wants to play again. That hurts us all. It also hurts deal flow, i.e. many of our lifeblood.

Enter three folks who I had the opportunity to share lunch with recently. First up is Brian Walker, a long-time colleague of mine who is an absolute guru in lean processes and leadership from the likes of Toyota for example. Eric Breitkreutz, a former PWC consultant, with operating experience at Barrick Gold (in better days) is the second specialist of this capable group. Rounding it out is Alex Gallacher, and his exposure to the M&A world through stints supporting BMO and TD’s investment banks, coupled with his team of keen thoroughbreds plucked from Master’s Programs at York & UofT. ENGAGE HR has been serving entrepreneurs more broadly for almost 10 years now. The latest is these three working together with an offering now called: Human Capital Due Diligence (HCDD).

These guys are not your typical HR folks. They like to help business owners make money, especially by enabling the right people, and they have some pretty significant experience in doing so. They can be tough when they need to be and kind when they have to be, having a strong preference for fact based decision-making. We’re not talking about the kinds of generalities that get us into trouble down the road on a deal. We’re talking about people who tell it like it is, work to avoid problems, and raise significant issues which can and should impact our views on valuations that purchasers rely on when acquiring companies. They also put together 100 day plans and help create sustainable performance plateaus once the deals are done.

In a recent transaction where Gallacher was called in, a purchaser was being pushed to close without having copies of up-to-date commission agreements for the vendor’s sales force. Worse still, when the vendor was pressed for these agreements, they showed up being completely inconsistent in their approach, missing altogether in some cases, and with one lucky vendor salesperson actually bagging 80% of total commissions in an industry where 50% or less is the rule! No wonder they were pressing for an early close! You can bet there were no vendor take backs on this one!

HCDD is primarily about effectively managing the purchaser’s human capital risk through the due diligence process. This includes: regulatory compliance; proactive legal claims prevention at both the corporate and personal levels; and, informed views on organizational capabilities inclusive of the leadership team, operating culture, governance constructs and additional opportunities within business processes.

My advice, next time someone says: ‘We’ve got that covered’ when it comes to the people side of due diligence, I call it “the sheep face”, give these guys a call. Their fees are on par with other experienced professional advisors. The best part is that it helps you build a better deal history for your clients. In the longer run this serves everyone’s interests, especially those of family businesses looking to carry their hard earned legacy forward in this fantastic country we call home.

by Mark Borkowski

Mark Borkowski is president of Mercantile Mergers & Acquisitions Corp. Mercantile is an M&A brokerage that specializes in the sale of mid market owner operated businesses. He can be contacted at mark@mercantilema.com or www.mercantilemergersacquisitions.com

If you have any questions regarding Human Capital Due Diligence (HCDD) and its potential impact on your next purchase or sale contact any of: Alex Gallacher at (416) 706-9707 or alex@engagehr.com, Eric Breitkreutz at (416) 558-0259 or eric@engagehr.com, or Brian Walker at (416) 818-8975 or brian@engagehr.com.