Executive Summaries Jan 13, 2023

Focus on the Human Side of Business Succession: An Intergenerational Bridge as the Solution to Talent Shortages

In 2023, the number one challenge business leaders are facing is undoubtedly the lack of workforce at every level of their company. Not only are these resources needed to keep the business going, but they are also essential to their growth ambitions.

While operational talent planning can meet short- and medium-term needs, underestimating the longer-term strategic value of human capital can be risky for the company’s sustainability or growth. Successful planning must focus on the workforce, either through a traditional recruitment strategy, through inclusion of succession in the ownership structure, which is becoming a more common scenario, or through M&A opportunities. Both of these last two elements are a breath of fresh air for any company that is inclusive and respectful of its generations.

Individual value plays a significant role in the company’s growth, as do the various sources of financing and the investment and partnership strategies.

Why Having a Common Destination Matters

Fulfilling the needs of the hidden jewels that every employer wants to find requires not only a clear growth plan, but also the ability to communicate a strong culture and vision for planning, recruiting and attracting the right talent. Aligning the destination with the individual’s motivations ultimately has a beneficial effect on mobilizing the troops and on the opportunities that will arise for the company once it has invested in their development.

Nowadays, a company must always showcase the comparative advantages, as well as the fun and fulfillment that it can generate and that sets it apart as an employer. Ultimately, work conditions are definitely important, but much less so than employees’ desire to achieve their full potential, to feel supported and respected as a person instead of just based on their skills.

Beyond sound human capital management, the key to an organization’s success rests on its ability to adapt and be open to change, whether it be technological innovation or its fundamentals, for example, in the event of a major leadership reorganization, a corporate merger or the transfer of power from one generation to the next, the issue remains the same.

Such a culture of change will necessarily involve an individual surrender for the greater good, a kind of openness and organizational serenity not to see the other as a threat or a hindrance, but as an added value to build together a strong and sustainable company where there is a willingness to capitalize on the complementary strengths of each generation and their various personalities, while still respecting the past and the future.

Aligning Values in a Transaction

Mergers and acquisitions are sometimes the quickest way for entrepreneurs to fill the talent gap. Beyond all the important technical elements, such as the financial and legal aspects of an acquisition, it is the identification of the human factors that will make these transactions successful. Under no circumstances should we underestimate the “fit” between those who are acquiring and those who are joining a company.

More and more companies and entrepreneurs are wondering about the people who will run their company after the acquisition. During the initial meeting, it is essential to understand what significance they give to the values defined by the organization, and especially to agree on the part that the outgoing leaders will play. Apart from the purchase price or operational integration, the seller will often express a willingness to help after the sale, but not as an extra. This support contract typically lasts from one to two years.

Moreover, there are an increasing number of earnout clauses in which the quality and retention of talent during the post-acquisition integration period allow the seller to raise or lower the sale price.

Talent selection becomes even more significant in a management buyout, where the existing employees or the next generation of employees in the case of family-owned businesses are buying out the company. One of the key factors for success is to set up a well-designed stock option plan beforehand, say from 10% to 15%, which is not only a motivating factor to be part of the company’s growth, but is also a way of being transparent and receptive to the different generations.

In turn, the younger generations will also benefit from respecting this demonstration of openness by the current management to ensure a smooth transition when the time comes. That being said, in order to achieve this, the availability of capital for the new generations is often an issue. Our major Canadian and Québec banks have an important part to play in supporting them, but there are also many investment funds that are very active and open to takeover opportunities in Québec. In fact, an acquisition can be made in partnership with a fund or a bank and the usual decision-making and exit clauses can be included in a shareholders’ agreement between the buyers.

Shareholding and Alternative Financing

Family offices have increasingly structured investment vehicles around professional managers to invest and facilitate such transactions. Private equity investments can even be majority-owned. The benefits of such private equity scenarios with family offices include not only the provision of the required capital, but above all the understanding of the market as well as the human and psychological challenges surrounding the intergenerational transfer of power so as to avoid any missteps during these riskier transitional stages.

Investment funds will also feel more comfortable and willing to invest in projects with a strong management team and succession plan in place. Aside from leaving the reins in the hands of the acquiring partner, the acquiring group will often seek to keep the seller around for a few years while transitioning, offering a minority stake in partial payment of the purchase price.

“In other words, a high-quality workforce will give the company more flexibility as events and business cycles change. The same is true for a smaller capitalization publicly traded company. It will be less afraid of closing its capital stock through private capital if it knows that it can count on strong individuals in-house to take over.”

Lawyers, accountants or professionals involved in the transfer of family businesses, such as industrial psychologists, must be aware of the various challenges motivating people, regardless of their age or level of experience within an organization. Working towards a common destination that allows for self-realization, self-improvement, and the ability to see farther is the key.

For more information on the human, commercial and legal issues related to mergers and acquisitions in a context of labour shortage, feel free to contact our team who will be happy to advise you.

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