Well-informed Company Acquisitions through Management Audits

In times of prolonged low interest rates and an increasingly overheated real estate market, many investors search for new forms of investment. Increasingly, they consider company acquisitions to be a profitable option. Often, however, they overlook significant risks in this process. Numerous studies have shown that the human factor is the biggest unknown. Even if it’s almost a truism that employees constitute the most valuable asset of a company, before and during the purchase, the focus is usually on other factors: typically, the product range, the competitors and the regulatory environment are carefully examined. However, even the senior management of a company is often only subject to a very superficial evaluation. This ignorance towards human resources entails unpredictable risks for the investor. A careful analysis of the management level is therefore highly advisable.

The Method of the Management Audit

Management audits offer an opportunity to get a comprehensive status report of the current capabilities of the management of a company. This approach takes the traditional due diligence claim seriously: all relevant aspects of a company need to be carefully evaluated prior to the acquisition. During the audit the management is analyzed in relation to personality characteristics and optionally also in relation to their cognitive skills. Depending on the customer’s requirements a number of personal characteristics and skills are tested. The individual surveys are transferred into an overall matrix of available competences. In the next step these results are compared to the target competence profile of the investor. Any deficits will show very quickly and in case there are any critical deviations from desired state, it will become visible early on. Adequate measures can be derived that may range from trainings for individual managers to comprehensive staff-related measures. In case of particularly serious deviations from the desired profile, investors may be advised against acquisition.

Practical Examples of Possible Audit Results

If, for instance, the managing director of a company sells his or her company, this step often leads to a significant gap in the sales area. In an audit this weak point would immediately come to the surface – before having any negative impact on the operational business. However, in many cases the deficits that show during the analyses will be less obvious. The personality report of a sales director may for instance reveal that he or she is too introverted to be an ideal candidate for this position. It can be a sensible measure to assign this person a new internal role and strengthen sales by other measures. In such cases both the company and the employee profit from the transition, since he or she will work in a position that fits his or her character much better. The investor will get the opportunity to initiate personnel measures in good time and thus have significant advantages in recruiting.

Challenges in the Application of the Method

Often a managing directors want to inform their employees about the impending sale as late as possible, since it can lead to considerable uncertainty. Unfortunately, precisely the top-performing employees tend to feel urged to leave the company in such situations. Companies that prepare the sale with due diligence, will usually add these additional expenses to the sales price – even if this is very understandable from the perspective of the selling party, it is clearly undesirable for the investor. Another common argument is that the purchase needs to be processed as quickly as possible, in order to keep the business situation from further deteriorating. Particularly unfortunate are cases in which it is uncertain who will be awarded the contract. Nobody wants to make advance payments without knowing if there’s a chance to recover these additional costs.

The Focus on Sustainability Generates Added Monetary Value

It can hardly be denied that these arguments seem to speak against a management audit prior to the purchase. However, a closer look on the current upheavals on the markets shows that only well informed purchase decisions lead to sustainable profit. The newly acquired company will only generate added value, if the entrepreneurial decision is based on a medium and long term approach. The more often and the more hectically a company changes their owners, the more doubts will arise, whether it is a profitable investment. The resources for a proper due diligence investigation alongside with the measures that are derived from this analysis are an important basis of the company’s future success. This carefulness in the preparation of an acquisition will turn the investment into a lasting success even in turbulent times.

Marko Kononen
Marko Könönen Senior Partner – CNA International Germany +49 40 870 93 405 +49 173 935 21 27

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