Risk Management: The risk of acquisitions

Know how to handle inherited employees

When Delores Crum, CERP, purchased a competitor’s tent and event rental business in 2009, she thought she knew what she was getting into. After all, Crum, president of Premiere Party Central, was hardly a novice, having opened her first location in 2000. Because both stores were located in Austin, just five miles apart, Crum was very familiar with that operation. Still, nothing prepared her for what happened once the deal was inked.

“Within the first 90 days, we lost 40 percent of the staff,” Crum recalls. “Several key employees immediately left to a competitor, taking with them clients, knowledge and other employees like the tent crew. The GM stayed on for about 90 days but left once the performance expectations were in place. The asset we thought we were buying immediately lessened in value.”

Purchasing a business where staff members already are in place potentially offers incoming owners plenty of advantages. Employees can be a company’s biggest asset, but, as Crum’s experience illustrates, inheriting employees also can bring unexpected headaches, not to mention increased exposure to risk. This can assume many forms, such as employee flight, retaliation, lower morale, poor performance, compromised customer service, even outright sabotage.

One thing many new owners of existing businesses don’t consider is how the work environment will change for the inherited employees, says Art Snarzyk, president of InnerView Advisors, a St. Louis-based firm specializing in employee selection.

“The culture of the old company is going to be different than that of the new company,” Snarzyk explains. “Every employee has his own assets and liabilities. The question is, will the new culture play to the employee’s assets or will it play to his liabilities?”

In fact, Crum believes this was a key factor behind the employee exodus that initially hit her. “The culture was totally different. The previous owners had been very hands-off, oversight was lax, and the accountability just wasn’t up to our standards,” says Crum, adding that the staff that remained was “excellent.”

Consequently, it’s essential that new owners accurately identify the existing culture and have a good idea of the type they want to create and how to shape this, says Snarzyk. New owners also must understand the kind of business they want to grow and if the employees will be a good fit. For example, Crum re-interviewed upper-level staff to confirm fit, resulting in some people moving to different positions. She also involved employees in the change process, holding individual and group meetings and conducting training and teambuilding sessions. Snarzyk applauds this strategy.

“This helps keep employees from feeling disgruntled and powerless and from retaliating,” he explains. “Change is scary; if they feel involved they’re going to be less of a risk to the business.”

Legal missteps — such as assuming employees have been paid in compliance with the Fair Labor Standards Act — also present a risk, says Bryance Metheny, an employment law attorney and partner with Burr & Forman in Birmingham, Ala.

“We advise clients to audit the method of pay for all employees and to review job descriptions,” says Metheny. “You can make changes once you buy the business but you must make these immediately. As a new owner, you’ll be immediately on the hook for any violations, including damages.”

Metheny recommends background checks, particularly of manager-level employees and those dealing with customers, even if the previous owner did this. “You need to make sure you’d still hire them,” he explains.

It’s also critical to audit current employee files to ensure there are existing I-9s — the form verifying the person is authorized to work in the U.S. — and that these appear valid. This is particularly important when it comes to seasonal employees. If there are missing I-9s, go back to those employees and obtain them.

Policies must be implemented fairly and consistently, Metheny says. “You also must be careful of disparate impact, such as a requirement that could weed out all women, for example, saying everyone must be able to lift 100 lbs. You must be sure your requirements are related to a condition of employment.”

Like Snarzyk, Metheny says it’s best to go in with a game plan. “You can go in and make changes right away, or you can go in and get the lay of the land first, but you can’t take a hybrid approach. Employees want to know the rules. You need to come in and tell them explicitly what to expect.”

Maura Paternoster is risk manager for ARA Insurance in Kansas City, Mo. For more information, call 800-821-6580 or visit  ARAinsure.com.