Due diligence starts with people
Written Chris Sheedy of The Hard Word
Much of the focus during a sale or merger naturally falls on revenue, client retention and recurring fees. But as HR specialist Leisa Messer FCPHR, Managing Director of HR Business Direction and Integrowth, says, buyers will always scrutinise the people side of the business and there’s plenty that can scare them off.
“The big issues include finalising any people issues that exist, ensuring HR foundations are right in terms of policies, procedures and processes, and then ensuring compliance,” Messer says. “Accountants might look at leave balances, but they might not look at HR compliance, IR compliance, culture or leadership.”
“A buyer would likely even want to know what do they do in terms of performance management, training and development. Is there succession planning? What is the culture and leadership like, etc.? If all of that is positive, it paints a very attractive picture as it aids in increased profits and a smoother transition.”
Kev Ryan, who advises accounting firm owners on business sales, says that “nice picture” translates directly into buyer confidence. In his experience, a well-documented and professionally managed people function reduces friction in negotiations and signals that the firm has been run as a business, not just as a technical practice.
“As a buyer, you’re looking for certainty,” Ryan says. “If the people side is organised, transparent and defensible, that’s one less unknown. It builds trust.”
Leave entitlements: Small detail, big liability
Amongst the broad sweep of HR issues, one of the most practical and significant for a new buyer is leave entitlements.
When the ownership of a business changes, personal leave and long service leave don’t simply disappear or restart from scratch. Instead, they automatically transfer to the buyer, as do entitlements or requests for flexible working arrangements and parental leave.
And so, accumulated balances become a part of the transaction. They become a cost or liability for the buyer and directly affect negotiations around purchase price. High leave balances in particular can represent a significant downside for the business’s value.
“A percentage of personal leave (that is sick or carers leave) liability would be taken into consideration in the purchase price, if it’s high,” Messer says. “That one is hard to reduce, for the seller.”
Easier to manage is the integrity of the records behind leave entitlements. Messer says record keeping failures are common.
“First of all, it’s about making sure that if people do take personal leave, it actually comes off their personal leave balance,” she says. “I think there are many businesses where this doesn’t always happen. It might be alluded to, but proper records are not kept and the balance is not always reduced.”
Poor record keeping doesn’t just create uncertainty for a buyer, it can also expose the seller to regulatory risk. “If Fair Work found out, there are penalties for that,” Messer says. “Proper record keeping is a requirement under the Fair Work Act.”
For that reason also, poor record keeping around leave entitlements can derail a deal.
“When buyers see messy leave records, they might wonder what else hasn’t been managed properly,” Ryan says. “It introduces doubt, and doubt affects value.”
Leave entitlements: Not just paperwork
Can gaps in leave entitlement record keeping be fixed retrospectively? “You probably could if you had the records,” Messer says.
However, it’s important to note that some remedies take time and cooperation from employees, she says. Requesting that staff take long service leave, for example, is far from an overnight solution.
Best practice, in Messer’s view, is simply to maintain accurate records and actively manage liabilities over time. So, if a business owner is planning a sale in the future, this increased focus on the people function should begin today.
Such management discipline has benefits beyond sale readiness, she adds. It encourages staff to take leave, supports wellbeing and reduces burnout. These factors also positively influence productivity and retention.
Most valuable of all, they contribute to a positive, happy and healthy culture, which is one of the most important factors for buyers and a good indicator to retention of employees.
Culture and leadership: The success driver
“If the culture is not great, nothing else in the business is likely to be great,” Messer says.
“I’d put culture and leadership at the very top of the pile when it comes to business success, and to a successful business sale.”
Culture impacts all of the business, she explains. It flows down to affect performance and KPIs and it very much impacts the bottom line.
“A buyer or buyer’s HR representative could figure out a business’s culture through simple conversations with people in the business, and they will do that,” Messer says.
There are more sophisticated forms of measuring engagement and culture, she says, but not necessary for smaller businesses.
Ryan agrees. “Remember, they’re not just buying fee income,” he says. “They’re buying relationships, team continuity and a way of doing things. If staff leave after completion because they feel unsettled or poorly managed, the value can erode very quickly.”
Leaving a legacy
For many who have built an accountancy firm, selling up is not without emotion. Close relationships with staff and clients will be affected by the transaction.
The desire to leave the business in excellent shape doesn’t just align with good commercial logic. Assurance around clean leave records and transparent, clear people processes are not just part of the commercial value story, they’re also vital to the creation of a positive legacy for clients and remaining employees.
For accounting firm owners considering a future sale, the message is clear – leave entitlements and people processes are not minor administrative details. Managed well, they enhance confidence and price. But managed poorly, they encourage uncertainty and risk.
“The firms that achieve the best outcomes are the ones that treat their people processes with the same discipline as their financial reporting,” Ryan says. “It shows maturity, and buyers respond to that.”
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