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How working from home became a factor in private equity M&A

Due diligence needs to identify changes to employment patterns such as hybrid or WFH practices.

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Published 28 April 2023

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One of the many legacies of the COVID-19 pandemic is the fact that it supercharged the acceleration of many companies towards hybrid working practices. Many companies had no option but to embrace the “new normal” of trying to do business whilst the majority, if not all, its staff worked from home. Having survived the painful, but necessary, constraints of lockdown, many businesses are still working out the optimal way to operate. However, crucially the crucible of COVID created the opportunity for hybrid working to achieve proof of concept, and it is likely that many businesses will continue to give their staff the ability to work in a more agile manner.

So what does this mean for private equity deals, when key to the assessment of many opportunities is a thorough understanding of how the staff of a target are performing, and the creation of a pathway towards improved performance. The hope is that by replacing presenteeism with productivity as the key metric, businesses will continue to thrive, the fear is that without more sophisticated tools to drill into performance it is going to be difficult to precisely gauge what specific staff bring to the table. Numbers have always been a blunt instrument when assessing individual performance, and hybrid working may further obfuscate the information that lies behind the raw data. In essence, when performing due diligence on the staff of a target it will become even more important that buyers have a deep understanding of where the centres of value creation sit in an organisation, and how the performance of those centres can be optimised.

From an employment perspective, buyers will need to establish the true working patterns of target employees, especially if the seller has not taken the step to put flexible working on a contractual footing. The due diligence process should identify where employment contracts have effectively been varied by the conduct of the seller or employee. Due diligence should also highlight any flexible working requests and requests for reasonable adjustments around working patterns. It should also expose any failures by the seller to offer flexible working and reasonable adjustments, and can help to identify areas of concern and potential liability.

If TUPE applies, buyers will need to remember that they may not be able to harmonise the contractual terms of target employees with their own. Buyers will need to factor in the additional managerial time required to deal with a multitude of working patterns, as well as the associated administrative and logistic issues.

Hybrid working may also complicate a seller’s ability to comply with its consultation obligations under TUPE. Buyers will want to assess the risk of non-compliance, and factor it in when seeking warranties and indemnities.

There are also softer issues to consider. For example, how best to integrate and manage two workforces with differing working patterns and cultures. Buyers will need to ensure managers have the tools they need to collaborate and connect with transferring staff who they may not share an office with. They will need to ensure that ‘proximity bias’ doesn’t creep into the decisions of office-based managers who give preference to staff they already know and can physically see, and not to the transferring remote workers. Mis-handling the transition could see talent moving elsewhere, thereby diminishing the value of the target business.

For more information, visit our Private Equity page.

This article was first published in the Private Equity News (PEN) on 21st of April 2023.

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Longer Reads

How working from home became a factor in private equity M&A

Due diligence needs to identify changes to employment patterns such as hybrid or WFH practices.

Published 28 April 2023

Associated sectors / services

  • Employment law for employers
  • Private Equity

Authors

One of the many legacies of the COVID-19 pandemic is the fact that it supercharged the acceleration of many companies towards hybrid working practices. Many companies had no option but to embrace the “new normal” of trying to do business whilst the majority, if not all, its staff worked from home. Having survived the painful, but necessary, constraints of lockdown, many businesses are still working out the optimal way to operate. However, crucially the crucible of COVID created the opportunity for hybrid working to achieve proof of concept, and it is likely that many businesses will continue to give their staff the ability to work in a more agile manner.

So what does this mean for private equity deals, when key to the assessment of many opportunities is a thorough understanding of how the staff of a target are performing, and the creation of a pathway towards improved performance. The hope is that by replacing presenteeism with productivity as the key metric, businesses will continue to thrive, the fear is that without more sophisticated tools to drill into performance it is going to be difficult to precisely gauge what specific staff bring to the table. Numbers have always been a blunt instrument when assessing individual performance, and hybrid working may further obfuscate the information that lies behind the raw data. In essence, when performing due diligence on the staff of a target it will become even more important that buyers have a deep understanding of where the centres of value creation sit in an organisation, and how the performance of those centres can be optimised.

From an employment perspective, buyers will need to establish the true working patterns of target employees, especially if the seller has not taken the step to put flexible working on a contractual footing. The due diligence process should identify where employment contracts have effectively been varied by the conduct of the seller or employee. Due diligence should also highlight any flexible working requests and requests for reasonable adjustments around working patterns. It should also expose any failures by the seller to offer flexible working and reasonable adjustments, and can help to identify areas of concern and potential liability.

If TUPE applies, buyers will need to remember that they may not be able to harmonise the contractual terms of target employees with their own. Buyers will need to factor in the additional managerial time required to deal with a multitude of working patterns, as well as the associated administrative and logistic issues.

Hybrid working may also complicate a seller’s ability to comply with its consultation obligations under TUPE. Buyers will want to assess the risk of non-compliance, and factor it in when seeking warranties and indemnities.

There are also softer issues to consider. For example, how best to integrate and manage two workforces with differing working patterns and cultures. Buyers will need to ensure managers have the tools they need to collaborate and connect with transferring staff who they may not share an office with. They will need to ensure that ‘proximity bias’ doesn’t creep into the decisions of office-based managers who give preference to staff they already know and can physically see, and not to the transferring remote workers. Mis-handling the transition could see talent moving elsewhere, thereby diminishing the value of the target business.

For more information, visit our Private Equity page.

This article was first published in the Private Equity News (PEN) on 21st of April 2023.

Associated sectors / services

  • Employment law for employers
  • Private Equity

Authors

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