Backing a business: do investors look hard enough at its employees pre-deal?
By: Mark Martin, Founder & CEO, Foundations Stones
The private equity model is built around buying businesses, investing in them, changing them and in doing so, increasing their value over and above what was initially invested.
In order to assess which businesses to buy, investors understandably spend a lot of time looking under the bonnet for possible surprises. They concentrate on the historical financials, the wider market conditions, competitors, customer base and how those customers are served and infrastructure amongst other things. The business plan is analysed within an inch of its life, and the management team doesn’t escape the scrutiny either – skills gaps are identified, succession plans are analysed and weak links are highlighted.
And yet, in many cases, little attention is paid to the workforce of the business,
its culture and its organisational capability.
What investors should also be asking is: Are the people in the business, from the bottom to the top, able and willing to do what is required to generate the additional value that the investor wants to achieve? If not, what measures have to be put in place to shift the organisation to a position where they are?
If the people within the business are not able or willing to deliver, the success of the deal could be at risk. At best, change may be slow and growth sluggish, at worst, the business may fail altogether.
In my experience, there are often two objections when this point is put across:
1) The champions of management
‘Get the management team right, and they will change the people in whatever way is required’.
Of course, the management team is critical. Culture is driven from above, and leaders lead by example. However, just relying on getting the management team right isn’t quite enough. There are plenty of examples where management teams end up failing.
Rather than asking ‘is the management team right’ the question should be ‘what is the challenge they face?’. Only then can the first question be answered properly. It’s about finding the best managers for the job that needs to be done, and defining what that job is surely precedes finding the best people to do it.
I believe that in some circumstances, if deal makers knew the real people challenges, they would think twice about doing the deal, regardless of the management talent pool available.
2) The call for a greater ‘legacy HR’ input
More and more, businesses are using cultural and engagement surveys to assess their teams. Whilst the rationale and thinking behind running such activities is undoubtedly sound, unfortunately many of the methods used fall woefully short. Investment is poured into post-deal talent management initiatives, cultural transformation projects, crafting values, leadership development and other such repackaged legacy HR interventions. Often, businesses use questionnaires that are fundamentally flawed, and many of these projects have less confirmed success than the craziest of UFO chasers.
So, what’s the answer?
Well, firstly, investors and other stakeholders need to agree that a deep dive into the people of an organisation should be a fundamental part of the due diligence undertaken. I keep coming back to it, but if employees throughout the entire organisation are able and willing to do what’s necessary to achieve the plan, then success is much more likely.
If this is the case, then they need to find a way of accurately assessing this ability. This is a chance for me to shamelessly plug Foundation Stones, my own business, but in the interests of objectivity, there are others too – just make sure the one you choose is fit for purpose.
And if it looks like the organisation is not willing or able to deliver what’s required, investors should take a long hard look at the deal, and identify a way of resolving these issues before taking the plunge and doing the deal.
About Mark Martin:
Mark is the founder and CEO of Foundation Stones. An executive with 30 years experience of HR, 15 at an executive level, Mark has led some high profile HR strategies, including the complex people separation from Royal Bank of Scotland prior to the IPO of Direct Line Group.
With Foundation Stones, Mark and his team help businesses identify and improve risk associated with employee behaviour, directly relating what people are willing and able to do with the strategic business goals. He has helped businesses including Quorn and Palethorpes.

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