By: Roman Kocur

When I was 23 years old, I participated in a three-week Outward-Bound trip in Alberta that took twelve of us on a challenging expedition that included climbing the Three Sisters Peaks near Canmore, Alberta. Our expedition was led by two experienced climbing instructors. I often describe buying a business in the lower mid-market similar to climbing the Three Sisters Peaks. If you know what you are doing or have the right expertise to assist you, you could have a safe and rewarding journey to the top of the mountain. If you do not, you could easily make a costly mistake. The same principle applies to buying a business in the lower mid-market. When a management team is “thin”, cross training is weak, key supplier relationships are informal or there is dependency on 1-3 large customers, which is not uncommon in the lower mid-market – it does not take much to make a costly mistake. If that mistake results in losing a key customer, supplier or employee, the impact may be a major hit to your return on investment (ROI).

At Massey Capital, we have made eleven acquisitions in the lower mid-market space since 2017.

Employee and Customer Retention is an important KPI

After each of our transactions is closed, there are numerous financial and operating key performance indicators (KPIs) that we track and analyze but none is more than important than employee and customer retention.

Employee and customer retention is a critically important KPI in the lower mid-market M&A space because employees and customers are typically the foundation of what is being acquired. Few companies in this space have valuable patents, technology or some other proprietary competitive advantage. As a result, a critical success factor for us becomes achieving 100% retention of key employees and customers twenty-four months after an acquisition is made.

Our team recently performed a historical analysis of our past eleven acquisitions completed during the period 2017 to 2021 and found that we have not lost a key employee, customer supplier. It is a KPI that we are proud of and one that we do not take for granted.

5 factors that are important to help achieve excellent employee and customer retention in the lower mid-market M&A space:

1. Design & Diligently Execute an Owner Operator Transition Plan
2. Source an Excellent Operating Partner
3. Design & Execute an Excellent 150 Day Plan
4. Take Responsibility for Your Emotional Wake
5. Possess both M&A and Operational Skillsets

Designing & Executing an Owner Operator Transition Plan

We typically acquire a business from an owner operator who has been leading his/her businesses for many years, often for more than 10 years. The owner operator typically has built strong and critically important relationships with employees and customers. After a transaction closes, our team begins executing on a carefully designed plan that focuses on a smooth transition of these employee and customer relationships. The successful design and diligent execution of this plan requires a combination of building trust, clear and concise communication, team collaboration, change management skills and project planning skills. Experience, judgment and humility also play a critical role in navigating this transition. The owner operator transition should be treated as one of the top three priorities post-closing. It will require a comprehensive written plan, constant adjustments and agile leadership.

Sourcing and Selecting the Operating Partner

At Massey Capital, we believe that “everything rises and falls on leadership.” Simply put, the single most important decision to be made that will affect the company after the transaction has closed is the selection of the operator partner who will replace the owner operator. The new operating partner (typically with the title of President or General Manager)  will come from either: the acquired entity if it is an MBO, Massey Capital’s current team, Massey Capital’s network or an external search. We have found that 9 times out of 10, the right new equity operating partner comes from the acquired entity or from our Massey Capital network. The key message here is that throughout the year, we spend half of our time prospecting acquisition targets and half of our time building a pipeline of exceptional leaders who are keen to join Massey Capital in top operating roles.

Designing & Executing a 150 Day Plan

After we close a transaction, we organize a team meeting to design a 150-day plan. The plan describes key tasks along with assigned ownership and target dates. It is critical that this plan be developed with a collaborative approach that includes all stakeholders. You would be surprised at how many buyers do a poor job at designing and executing a proper 150-day plan.

Taking Responsibility for Our Emotional Wake

Post-closing communication with employees and customers is a critically important stage in the acquisition process. It is at such times that communication needs to be exceptional. As Susan Scott writes in her book, Fierce Conversations, “for a leader, there is no trivial comment. Each time we speak, each time we send an e-mail or text, we leave an emotional wake. We soothe panic attacks or cause them, leave people feeling charred or uplifted. Our individual wakes are larger than we know.” During the post closing acquisitions process, an error in communication is often amplified causing misunderstanding, confusion or even an emotional plane wreck. This is very similar to climbing the Three Sisters mountains where small mistakes can lead to disastrous outcomes. You must always remain meticulous. At Massey Capital, we spend significant efforts ensuring that all written and verbal communication with the newly acquired team members is at the highest level of clarity, value-add and alignment with our values.

M&A vs Operational Skillset

Notwithstanding the importance, complexity and breadth/depth of work involved in closing an acquisition transaction in the lower mid-market, the skill-set and experience required post-closing demands a different leadership skillset. The skills, knowledge, experience and network that were required to source, analyze, win and close a transaction needs to be set aside the day after closing and needs to be replaced with an operator’s mindset and skillset. If you are contemplating on making an acquisition and do not have this operational experience, do not assume that you can figure this out on your own. To be successful in the lower middle market, you will need to have a combination of both the M&A and operational skillset on your team.

On a Final Note

If you or your team are contemplating making an acquisition in the lower mid-market, a tremendous amount of focus and energy will be required to source, analyze, win, fund and close the transaction. While working towards closing the transaction, do not forget to properly prepare and plan for achieving 100% employee and customer retention post-closing. You may be surprised to find out that many buyers fail at accomplishing this critically important goal.

Proper attention to customer and employee retention should be your most important KPI after an acquisition. It will drive your ROI and set a foundation to allow investment and innovation to take the business to the next level.