Getting the Right Management

When making an acquisition, the management team to be inherited, if any, is as important as the business acquired. The management team sets the tone at the top and drives the culture of the business acquired. 

The management team to be inherited as part of an acquisition needs to demonstrate characteristics that are desirable to the acquirer. As part of the acquisition, the following are some characteristics and areas an acquirer should look out for:

Integrity 

Integrity builds the foundation of leadership. According to a research by Robert Half Management Resources, it is one of the most important attributes both employees and C-suites leaders look out for in a leader. Tone at the top is critical in defining a business culture. A management team with integrity is able to build up an ethical business culture. Enron, Worldcom, and Theranos are examples of corporate failures due to unethical business practices. 

A management team with integrity ensures lasting relationships and trust with stakeholders to build on and foster a lasting, sustainable business. Acquirers should consider and assess the integrity of the to-be-acquired management team as part of their acquisition process, either through thorough background checks or reference checks.

Performance Track Record 

Management team’s track record throughout their tenure with the organisation is an indicator of their ability and credibility. By analysing their track record, an acquirer would be able to assess their capabilities and understand the quality and skill of their management.  A management team with the right experience and track record is more likely to be able to meet not just short-term goals but also long-term objectives and aspirations of the investors for a business.

Skin in the Game 

The agency theory states that conflicts would occur between the management team and the shareholders of the organisation, unless they are tied together with a common interest.  One way to ensure common goals and interest is through the use of earnouts. Earnouts align the management team’s interests with that of its investors as the purchase consideration is tied with the performance of the business acquired. Another means to align interests is through the use of performance-based compensation, such as providing equity interest as part of the compensation package for the management team.

Although skin in the game is important, it is necessary to strike a right balance in the compensation package for the management team. Without a right balance, the management team might be incentivised to adopt unsustainable practices, or worse, undertake ethically questionable practices. A thorough assessment of the management team’s compensation package post-acquisition should be undertaken and negotiated prior to completion, aligning the interest of the management team with the acquirer’s.

The sustainability of a business is dependent on its management team. The right management team would not just protect and maintain the value of a business, it would also enhance the value of a business, and ensure a smooth transition and integration post-acquisition.

*This article was contributed by RSM Singapore and was originally published in the report on ‘Getting the right management’.