#518 The Human Side of M&A: Strategic Leadership Insights from Byron McFarland and Niels Brabandt
The Human Side of M&A: Strategic Leadership Insights from Byron McFarland and Niels Brabandt
In this week’s leadership podcast and videocast, Niels Brabandt interviews Byron McFarland to explore a dimension of mergers and acquisitions that remains critically underestimated: the human factor. While M&A is often framed as a legal and financial exercise, this conversation demonstrates that organisational value is fundamentally driven by people, not paperwork.
M&A Beyond Legal Transactions
Byron McFarland challenges the conventional perception of mergers and acquisitions as predominantly legal processes. In reality, the individuals responsible for delivering business performance represent both the greatest opportunity and the most significant risk during a transaction.
Leadership Alignment as a Value Driver
A central insight from Byron McFarland is the necessity of preparing the senior leadership team well in advance of any transaction. Leaders must not only understand the rationale behind the sale but also clearly see what is in it for them. Without this alignment, value erosion during due diligence becomes a tangible risk.
The Economics of Retention
The interview highlights a critical financial reality. Losing key personnel during a transaction can significantly reduce valuation. Given that many businesses are priced based on multiples of earnings, even a minor decline in performance can translate into substantial financial loss.
Incentives as Strategic Instruments
McFarland outlines practical mechanisms such as structured sale bonuses, designed to ensure leadership continuity throughout the transition. These incentives are not optional. They are essential tools to stabilise organisations and provide confidence to potential buyers.
The Myth of Replaceability
A particularly striking point in the discussion is the rejection of the idea that all employees are easily replaceable. While theoretically true over the long term, the immediate loss of key individuals can disrupt operations and undermine client relationships, particularly in service-based industries.
Human Capital as the Core of Valuation
Byron McFarland makes a compelling case that the majority of business value in M&A transactions is derived from goodwill, driven by human relationships and consistent performance. For decision-makers, this reframes M&A from a transactional exercise to a leadership challenge.
Managing Fear and Uncertainty
The conversation also addresses the psychological impact of M&A on employees. Fear of job loss, particularly in the context of automation and artificial intelligence, can destabilise organisations. Effective communication and leadership focus are therefore essential to maintain operational continuity.
Conclusion
This interview between Niels Brabandt and Byron McFarland provides a decisive perspective for executives. Mergers and acquisitions are not won in the boardroom alone. They are secured through leadership, trust, and the strategic management of people.
Niels Brabandt
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More on this topic in this week's videocast and podcast with Niels Brabandt: Videocast / Apple Podcasts / Spotify
For the videocast’s and podcast’s transcript, read below this article.
Is excellent leadership important to you?
Let's have a chat: NB@NB-Networks.com
Contact: Niels Brabandt on LinkedIn
Website: www.NB-Networks.biz
Podcast and Videocast Transcript
Niels Brabandt
When you listen to anything regarding M&A, you probably think of the same person: legal people, the lawyers enter the room. And that's what most people think. However, there's more to M&A, and we have an expert on the matter with us here today. Hello and welcome, again, backed by popular demand, Byron McFarland.
Byron McFarland
Well, hello, Niels. Good to see you again.
Niels Brabandt
Thank you very much for taking the time again. You see, you have a real fan group here right now. So you talk about the human side of M&A, and most people say, "Look, M&A, we work our business, we do our thing," and then lawyers are working their thing in the boardroom, and suddenly it's all we are merged and then we are one company. That's what most people perceive M&A like. They say, "The legal people do their job, we do our job, we have to deliver a bit of papers," and suddenly we are merged.
Niels Brabandt
What do you see as the human side of M&A?
Byron McFarland
The people that are actually delivering the result on behalf of the business present both opportunity and risk. The individuals who are playing key roles within the organization, either leading departments, sales, or operations, or even teams, human resources, if they feel like they're being disrespected in a transaction, or they fear being somehow or another marginalized in a transaction, they can create adverse outcomes for the business owner during the most sensitive period of due diligence, which is when they do the when they want to interview the management team.
Byron McFarland
In my experience, if the owner has not prepped the senior leadership team and have them agree in principle that selling this company makes the most sense now, and they understand what's in it for them, then chances are that leader is going to say or do something in that end stage of due diligence that could result in value leaking out of the bottom.
Niels Brabandt
The main question now is, when you want to prepare your seedler, how do you properly prepare them that they are because these interviews can be tough, and they get into details there to a very high extent. So how do you prepare people when they don't really know what kind of interview's coming up there?
Byron McFarland
Well, first, I have my owners ask their senior leadership team how they'd feel about making this change and telling them why this change is important to the owner. And then further, have them share with the leadership team what we need them to do in order for this change to actually be realistic in the way of an outcome. And finally, answer the question that everybody wants to know: what's in it for them? And so that's how we approach it: share with them where we're going, why it's important to go there, what they need from the leadership team, and then what's in it for them if we're successful.
Niels Brabandt
What happens when the "what's in it for them" is rather unclear because they know that the situation is not, let's say, that easy? Maybe they say, "Look, we had an owner. The owner doesn't have any children that want to take over the business. We know they have to sell. They want to retire. None of the children show up to actually buy it. It's not offered to us. So we actually know it's happening anyway. So where is the "what's in it for me" in that situation? How to deal with these?" Because we will have a lot of businesses facing that situation the next 10, 15 years.
Byron McFarland
Yes, it's a very common problem. And we routinely are creating sale bonuses that are tied to the transaction. For example, if the owner successfully closes a transaction and gets paid, then the senior leadership team would receive a sale bonus. And we commonly structure the bonus so it's paid in two installments. The first installment is at closing, and the second installment is, say, a year or 18 months from closing, so that they're encouraged to stay through the transition, which gives the buyer a sense of confidence that they can continue to operate through the integration of the organization.
Niels Brabandt
Yeah. Would you say that you should disclose that kind of bonus? Should you disclose to the buyer, "Hey, I'm paying my people a bonus on this now and in 18 months"?
Byron McFarland
Oh, yes. That's part of the due diligence on the buy side is to determine whether or not there's a defection risk that exists in there in the leadership team, and that having the plan in place is a value additive step for the owner, for the selling owner.
Byron McFarland
By providing the seller, providing the buyer with certainty that the leadership team is going to stay through the transaction, presents stability, continuity for the buyer. So the buyer knows, "Hey, I've got an in-place leadership team that can continue to run this business. They're motivated to stay because they're getting this piece of the action."
Niels Brabandt
Excellent. Now I have to confront you with one statement which, when I prepared here, one lawyer told me who's working for a very well-known three-letter consultancy company, which you most likely know, and he does M&A. He says, "Look, when they want to leave, they can leave. Anyone is replaceable. When someone from the senior leadership wants to leave, let them go. We will find someone else." What's your take on that approach where they say, "Look, just get the deal closed.
Niels Brabandt
It's an M&A. When they want to leave, they leave. We find someone"?
Byron McFarland
I would say that seems like an unnecessary risk for the seller to take because the buyer doesn't have an in-place leadership team that they're going to tuck into the operation. And typically, most businesses are priced based on trailing 12 months earnings. So if the senior leadership team becomes aware that there's a transaction imminent and they're not happy about it and they leave, that adversely affects the trailing 12 months earnings. And with these multiples of 8 to 12 times trailing 12 months earnings, a $100,000 loss in income based upon the loss of a person could be a million-dollar value hit. So I don't see where it's worth it.
Niels Brabandt
Yeah. Excellent. Fully agree here. How do you deal with the situation which happened in my circle of friends where someone, during an M&A, when he was confronted with the idea of, "We're going to sell this," it was a marketing company that was well-growing, but the same problem, children didn't want to take over the business.
Niels Brabandt
The owner was almost 70 years old, wanted to sell, and he sold it to a major marketing corporation. And one of my friends said, "I am not working for corporations. I'm deliberately working for owner-led businesses. When he sells, I will leave." I mean, that's at least very transparent. He said that when you sell this, I'm going to be gone in a year. But how do you deal with that situation when you want to sell your business for a good value?
Byron McFarland
If that person is key to the valuation, then I would negotiate with them to compromise their plan and reward them substantially, meaningfully, so that they would be encouraged to stay through the transition and allow the buyer to then integrate somebody else into that position.
Niels Brabandt
Do you mean for a year, for two years? What is the usual timeframe you would estimate here?
Byron McFarland
It really depends, Niels, on the level of contribution the person's making to profitability.
Niels Brabandt
It would be leading salesperson, that person that held most of the client contacts in their hands and knew these clients for 15 years plus.
Byron McFarland
Then that sounds like value risk. And if I was the seller or actually, if I was the buyer, I would be asking the question, "How transferable are those relationships to us?"
Byron McFarland
And if they're not highly transferable, meaning that they're somehow or another emotionally connected to the people, they're not under contract, they're all project-based, and this person is the one who keeps them coming back, then I would be negotiating as long of a term of relationship with them as possible.
Niels Brabandt
Excellent. So when you now talk about the human side of M&A and some people still insist on saying, "Look, it's probably 20% human side. It's 80% transaction on the legal side." Would you agree with that, or would you say it's a different percentage?
Byron McFarland
Well, valuations are largely blue sky.
Niels Brabandt
Absolutely.
Byron McFarland
And blue sky is usually the result of clients' willingness to keep coming back or new clients' willingness to sign on. And so far, I haven't seen where automation's able to replace a human in bringing on clients or managing the challenges the clients have in their routine workings with their vendors. So I would argue that 80% of a transaction value is goodwill, which is usually the result of people doing the right thing.
Byron McFarland
Other than prior to AI, where software as a service, you could sell the software as the blue sky. But the majority of businesses I deal with are service-based businesses, and their blue sky is people doing very predictable things that make clients happy. And if that isn't recognized, then that's a balance sheet sale, which is book value, which in my case, service businesses represent less than 20% of the value of any transaction.
Niels Brabandt
Yeah. Absolutely. And of course, one question I have to ask because you brought the term up now. When now some buyer shows up and says, "Look, we look at your business and we have AI on board, and we can cut your staff by 30% as soon as we buy it," that will very quickly make the round amongst the staff of the purchase being done here.
Niels Brabandt
How do you deal with situations when people—and that is a common reaction—they hear M&A and immediately people are scared losing their job, especially when someone pulls out the term AI, saying, "Oh, you have production staff, automation and AI. We're going to cut jobs here."
Niels Brabandt
How do you deal with that situation that you still keep the buy-in high when people say, "No matter what bonus you offer me, no bonus is going to pay off when I live in my area and I'm unemployed, that bonus lasts for a year, and then I'm still there with no money, no job, no future"? How to deal with that situation on the human side of AI?
Byron McFarland
Oh, let's talk about cascading the message. Typically, in a transaction, the people that know about the transaction are the ones that are immediately surrounding the owner. And there's rarely ever any cascaded message below that. So normally, the department heads would know the transactions occurring. And in some cases, not all of them know.
Byron McFarland
But in the projects that we lead, we're advising our clients to bring their leadership team in on the plan so that we can have them participate in the interviews, give the buyer a sense of confidence that the numbers and the processes that have been presented are all as they've been described. There's nothing I can really do about people below them to get them convinced that they're going to be okay. So we focus on the senior leadership team, stabilizing them.
Byron McFarland
And then if the organization that is acquiring them is going to replace labor with automation, that's part of the value that they're basically creating for themselves in the transition. They're going to deal with the fallout. They're going to know that there's going to be psychological impact of that. But the ones who get to stay, given the current state of the economies, they're probably going to feel lucky that they get to keep their job.
Niels Brabandt
Yeah. Absolutely. Appreciate the honesty here. Perfect. And when now people say, "Look, we're dealing with exactly these kind of issues here, with exactly that situation. We need help on the matter. You have lots of experience here," and people wonder, "How can we get in touch with you?"
Byron McFarland
Well, my website is themcfarlandgroup.com. My LinkedIn is Byron K. McFarland, and my email is byron@themcfarlandgroup.com.
Niels Brabandt
I think these are the perfect final words. We see M&A has a human side, and you need to deal with it when you want to get the right evaluation. So at the end of this podcast and videocast, there's only one thing left for me to say. Byron, thank you very much for your time.
Byron McFarland
You're welcome, Niels.