April 9, 2019
Merger and Acquisition Employee Benefit Pitfalls
In today’s business environment, companies deciding to grow through acquisition are more and more common. Acquisitions are often a long drawn out process with many unique considerations between the buyer and seller. When the purchase involves any type of significant labor force, sophisticated buyers take a very detailed look at the employee benefits at each organization.
Understanding the disparity between the purchaser’s plans and the seller’s plans is very important for three very different reasons: cost, best practice, and culture.
Many acquisitions are completed with only a partial picture of the benefits costs. Companies tend to be very good at looking at annual expenditures related to the benefit plans. However, they often overlook the contingent liabilities. Anytime a purchaser buys a company that offers a self-insured plan, there are contingent liabilities (specifically they are incurred but not reserved and run out costs). Given that group medical plans can show up as high as the 3rd most expensive item on a P&L, assessing that there could be as many as 2-3 unreserved months of expenses when these plans are shut down is fairly important. Additional cost considerations include compliance requirements that employers can plan for in advance (as opposed to paying for penalties assessed when violations are discovered).
Sometimes an acquisition provides an opportunity to improve the overall benefit package offered by the purchaser. It may make sense to replace the purchaser’s providers if the seller’s vendors are more cost effective, have a better funding strategy, or are superior from a technology/process evaluation. This is true from the medical network all the way down to the benefits administration system.
If the labor pool/talent acquired in the acquisition is important to the purchaser, clearly identifying and understanding culture is incredibly important. The purchaser must have a clear understanding as to the relative level of benefits that they offer compared to their industry peers. As acquisitions are considered, the same measure must be used to assess the seller’s benefit packages. If there is a significant disparity, experienced purchasers will create a very intentional plan for transition and communication. Anytime there is a change in ownership, employees begin to be concerned for their professional futures. It is natural to think that the purchaser will not necessarily share the same values as the previous owners. Clear and constant communication of the benefits plan, corporate values, and employee appreciation goes a long way to reducing unwanted turnover cost.
Brick Brickley, CEBS
Brick leads Spherient Advisors M&A practice and has significant experience and a vetted process to help clients work through prospective acquisitions.
