S-8 JANUARY 19-25, 2015 CORPORATE GROWTH & M&A Advertisement BEST PRACTICES Sharpening the HR focus on due diligence BY NAN ZIELENIEC When it comes to acquisition due diligence in the small to midcap sector, a sharp focus on human resource (HR) matters is critical. Any deal can be replete with HR challenges, which become evident from the initial management presentation through closing and into integration. Transactions and operations teams, attorneys and brokers regularly deal with HR matters, but do the matters always get the attention they deserve and are they always approached in the most practical way possible from an HR perspective? continued ownership/board HR matters span the due involvement of former diligence checklist. Items owners, negotiated earnsuch as talent assessment, outs, integration challenges corporate culture, talent acof an add-on, compliance quisition/retention, layoffs/ matters unique to stock or severance, compensation, asset deals and separation benefits, executive agreeissues unique to a corporate ments and non-competes, divestiture. In a corporate financial processes (includZIELENIEC carve-out, you have specific ing payroll), risk matters and critical HR challenges (including pending employthat should be addressed early in the ment litigation and workers comdrafting of the purchase agreement. pensation), and union agreements For instance, you may be acquiring are all examined in due diligence. a staff that is initially ill equipped There are also diligence items that to handle many of the functions may not be readily identified as HR formerly handled by the parent but should be examined from an HR company. Couple this with the fact perspective. These items include that often there isn’t the technology within the new portfolio company to independently operate the general ledger, pay the employees or even send an email. It pays to devote early attention to whether or not you need a transition service agreement or an employee leasing arrangement. All of the above matters have a meaningful financial impact on the deal and present unique challenges in managing the company from the beginning of the new ownership and often through the first quarter and beyond, depending upon how quickly the portfolio company can detach itself from the prior owner. Sharpening the HR focus on due diligence will elevate many of the above matters from a mere check-off to strategic matters requiring careful planning and forethought. Early identification of these strategic items during diligence will accelerate the attention these matters receive during the integration effort, hopefully laying groundwork for a smooth welcome to the new portfolio company. Nan Zieleniec has partnered with Resilience Capital Partners as its Senior Vice President of HR and also operates Zieleniec Consulting, LLC, an HR consulting practice based in Cleveland. Contact her at nzieleniec@resiliencecapital.com. Understanding working capital impact on M&A deals BY MARK B. BOBER The way working capital is structured in any M&A deal can be an important consideration in the economics of the agreement. A typical deal is priced on a debt-free/cashfree basis, so that the seller retains cash and also pays off debt with the proceeds of the deal. This Net Working Capital (NWC) threshold or target is intended to protect the buyer and seller from manipulating working capital to the benefit or operate the business. detriment of one party. Generally speaking, buyTypically, establishing an ers and sellers often begin NWC target is not outlined in by analyzing historical the Letter of Intent stage of working capital during a the deal. Rather, it is gener12- to 18-month period in ally addressed during the due order to establish a trend. diligence stage, once the buyer However, if the trend in has had a better opportunity to revenues reflects growth, analyze the appropriate level BOBER the expectation would be of working capital to be pegged that the required level of in the target. The spirit of the working capital would increase. And NWC target is for the buyer to receive if there are seasonal trends in reva business at a purchase price that enue, then the timing of the closing leaves adequate working capital to could impact the NWC target. Another area to consider is the impact of debt-like liabilities on the NWC target. For example, if there is deferred revenue or customer deposits, this will need to be addressed, particularly given the typical deal is cash free (i.e. seller keeps cash). Therefore, the buyer has the obligation to deliver on the promised product or service but the seller retained the cash. This is one example of a consideration that needs to be analyzed with respect to NWC, and the extent to which if treated as debt-like, identifying whether it is at the full amount of the deferred revenue/deposit liability or only the cost to fulfill the obligation. Other obligations buyers and sellers must consider would include accrued bonuses, warranty claims and accrued/ deferred commissions, to name a few. Mark B. Bober, CPA/ABV, CVA, CFF, is Partner and Practice Leader, Transaction Advisory Services for Bober Markey Fedorovich. Contact him at mbober @bmfcpa.com or 330-255-2425. M C L L Minimizing risk,  so you can seize  opportunities McCarthy Lebit protects client interests in the  purchase, sale, merger, consolidation and  restructuring of businesses.  Investigate. Learn. Share. Prosper. Our sophisticated counsel allows clients to take  advantage of opportunities while diminishing liability. Please call Michael Makofsky or Kenneth Liffman  at 216.696.1422 to learn more. Meaden & Moore’s Transaction Advisory Service professionals deliver quality, accuracy and speed in a complex mergers & acquisition market. Our Transaction Advisory Services include: Acquisitions & Divestitures | Due Diligence | Business Valuations Ownership Transition | Tax Consulting & Structuring 55 Years of Excellence To reach our Cleveland office, call 216.241.3272 meadenmoore.com McCarthy, Lebit, Crystal & Liffman Co., L.P.A. 101 West Prospect Avenue, Suite 1800 Cleveland, Ohio 44115 www.mccarthylebit.com Crain’s Cleveland Business Custom Publishing