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Everyone knows that client concentration is a major issue when acquiring a company. It’s simple. If you have only a couple of large clients and they cease to be clients well then you don’t have much of a business. But what of employee concentration?
Employee concentration exists when a small of number of employees have a relatively high understanding of the business’ inner workings. It is a sure fire recipe for disaster. Why? Because what we have found is that employees tend to be loyal to their previous employ. Because when changes occur, such as the introduction of new ownership, long-time employees become weary of changes and in turn react irrationally.
Specifically employee concentration exists when:
- Client relationships are tied to an employee
- The inner workings of the company are understood by only a limited number of individuals
- Technical and operational capabilities are limited by the know-how of a limited number of individuals
The possible outcomes if not handled appropriately:
Employees will seek to leverage position leading to
- Higher compensation – re: raises and bonus increases
- Internal conflicts amongst employees due to increased perceived or real leverage
- Possible loss of business or technical competence due to employee’s resignation
The bottom line is that no matter what the consideration taken at time of closing, one must buy a company with eyes wide open. Mitigation of personnel issues before they have a chance to fester and cause lasting damage is key to a successful acquisition.
Small Company M&A Insider 