Don't underestimate the importance of human capital for business transfer planning

Planning on buying a business? Since the transaction will have a direct impact on the company’s employees, evaluating human capital throughout the process is key.

For certain key employees, especially senior management, the transfer will mean they will have to adapt to a new owner and new roles and responsibilities. This can affect the company’s business and future. So making sure they buy in to your vision is key. Richard Quinn, Director, Business Transfer Support Team, at Desjardins Group offers a few important points to consider.

Competency and relationships

First check that the company’s key functions are taken care of, especially sales, marketing, purchasing, production, logistics, finance, human resources, and R&D. It’s important to ensure that the people in these positions are competent. You need to examine not only their training and technical knowledge, but also their seniority at the company and their relationships with the company’s customers and suppliers. Having the employees’ files on hand, studying the documented information, and preparing questions for the seller and key resources (see below for some examples) will help you make the right decision.

Employee engagement is key

Another important issue is employee loyalty and engagement toward the company. Observing the work environment is essential. Do the employees work well together? Do they adhere to the corporate vision and values? Do they have a strong sense of belonging? In other words, will they want to stay after the transaction?

Organizational structure

In small and medium-sized businesses, human issues are critical at the time of sale, especially because the successor will be dealing with a high level of stress (their own and that of the teams in place) during the transition period. That brings a level of uncertainty for employees, who have to adapt to a new management team and may resist change. Many times people who have been passed over yet decide to stay become negative influences. So before buying a company, it’s important to study its organizational chart. The quality of the managers has a direct impact on the company’s performance and value. Among the factors to be taken into account are their training, commitment, and motivation.

Building a strong team

Before buying, you must also make sure that the company is profitable, its business processes are well managed, and there is a good work environment. However evaluating human capital involves many unconscious perceptions, judgments, and biases. To minimize mistakes, it’s a good idea to get some help from experts in human resources, business management, and organizational development. They will base their evaluations on rational, objective criteria and will help you make the best possible decision.

Questions to ask the seller and key resources

Below are a few questions that will help you assess the quality of the company’s human capital.

  • If you could start up a new business from scratch, which ten people in the company would be on your dream team?
  • Who has had an impact on the company’s success?
  • Are they open to meeting with me?
  • How did you recruit new employees?
  • Are your key people happy with their current working conditions?
  • Do they want to stay at the company after the transfer?
  • Have non-solicitation or non-competition clauses been included in the employment contract in the event of the unexpected departure of an employee?
  • Does the company have a documented succession plan?

The answers you get will tell you a lot about the company’s human capital and will serve as a starting point for serious discussions with the seller. They will give you a better idea of what your team might look like after the transfer.