In the context of company acquisitions as well as the acquisition of shareholdings, the performance of a due diligence with the aim of securing the opportunities and risks associated with the investment in the best possible way is considered to be an integral part of the overall process.
Typically, due diligence procedures focus on the profound examination of the areas: Strategy & Market, Finance, Tax, Legal, Human Resources, Technology and IT. However, a decisive aspect that is all too often ignored is a well-founded analysis of the competencies and potentials of the management – against the background of the targeted corporate development.
Although HR due diligence examines personnel-related issues, it usually focuses on administrative HR issues such as personnel structures, pension plans and the contractual arrangements of existing employment relationships. The question of how well the management of the company – the executive board and the first management level – is able to realize the entrepreneurial goals of the investors in the sense of the company’s development is too often given no or only insufficient importance.
In this context, it is the company’s management – primarily the executive board, but also those responsible for operations at the first level – that is responsible for achieving the company’s goals in the interests of the owners.
The strengths and weaknesses of a company, and thus its success, are causally an expression of the strengths and weaknesses of its senior managers.
Consequently, the competencies and potentials of managers have a decisive influence on the successful management and control of a company. Corporate development therefore means above all promoting the strengths and compensating for the weaknesses of managers.
Investors’ knowledge of the management resources available to the company to meet future challenges – and thus to achieve its strategic goals – is of paramount importance in this regard.
Management Due Diligence
Against this background, it makes sense to carry out a systematic and in-depth analysis of the given management resources within the scope of acquisition projects in order to ensure the strategy-oriented use of these resources.
Often the acquisition takes place in the context of a management buy-out (MBO), through which the MBO management commits itself financially to the company, but which does not yet provide any certainty with regard to the expected performance of the management as a whole – especially not with regard to the operationally responsible management on the first level outside the executive board. It is therefore advisable to analyse – together with the MBO management – the management competencies and potentials available for the realisation of the intended company development, even after the purchase has already been concluded.
Ideally, this “management due diligence” is carried out after the signing of the Letter of Intent (LoI) as part of the overall due diligence process – thus helping to hedge the investor’s risk. It enables investors to make their purchase decision on the basis of a comprehensive knowledge of the management resources and to include possible costs for management development measures and new appointments from outside in their calculation and to initiate corresponding measures promptly in the event of a purchase. Without management due diligence, necessary adjustments to the management and organisational structures may only become apparent after the closing and thus possibly delay the implementation of defined objectives.
Cost and time considerations, as well as micro-political reasons, can sometimes mean that there is no adequate scope for a comprehensive analysis of the entire top management team as part of the due diligence process.
In such cases, it is advisable to focus first on MBO management and to examine the competencies and potential of the first level after the acquisition. It is also advisable to carry out a management potential analysis (MPA) after the purchase has been concluded if it can be assumed that carrying it out as part of the due diligence process could evoke sensitivities on the part of the management in question and negotiating, which could have a negative impact on the overall project.
Thus, even after a purchase has already been made, a precise understanding of the given management resources is of great advantage to investors. It provides them with a realistic knowledge of the adjustments to management and organisational structures that are necessary to achieve the company’s goals in the best possible way. In addition, the MPA provides clarity on the precious value of “human capital” at management level – a value that should be reflected in the overall value of the company – and thus in the expected sale proceeds – with a view to a possible resale of the shares.
Our consulting services to ensure the strategy-oriented deployment of management resources include, in addition to the MPA, a management competency structure analysis (MKA) as well as a leadership and performance culture analysis (FLA).
All three instruments are described below.
Management Competence Structure Analysis (MKA)
The management competence structure analysis (MKA) develops a differentiated competence model on the basis of concrete future requirements in order to align management competences with the realisation of corporate goals.
Using a workshop methodology, the managers to be involved work out the specific challenges facing the company over the next five years. The concrete requirements for the organization and the management are derived from these challenges.
Based on these requirements, it is then necessary to review and further develop both the structures and processes on the one hand and the given management potential on the other.
The workshop method takes into account the fact that each manager in the top management group has his or her own assessments and expectations regarding future challenges. The process of insight regarding the challenges to be overcome is based on the questions: “What needs to work differently / better in the future?” and “How can this be achieved?”.
Such a strategy workshop can also be an interesting kick-off forum for all advisors involved in the due diligence process.
Management Potential Analysis (MPA)
The Management Potential Analysis (MPA) is about the evaluation of competencies and potentials.
The aim is to identify in each individual case what potential a manager has and what development potential he or she can tap for new, challenging tasks.
The MPA comprises a self-assessment, an external assessment by the direct superior (if applicable, the investor) and a potential dialogue with two executive consultants. Where appropriate, internal/external references may be added to the methodology.
This multimodality ensures an emotionally stable basis for the feedback from the potential dialogues.
This way of analysing potential is a deliberate departure from the usual management audits in that – building on the MKA described above – it actively incorporates the knowledge and insights of each manager for the development of the objectives and the scale of the potential analysis.
Leadership and Performance Culture Analysis (FLA)
The Leadership and Performance Culture Analysis (FLA) takes the form of a web-based survey of the managers to be included. It analyses the cultural parameters in management that are critical to success, so that these can be aligned with the corporate strategy.
For the investors, the appointed management and the HR managers responsible for management development, important decisions and measures remain to be taken after the evaluation of the results obtained with the help of the instruments described:
- Which organisational development measures in the individual areas of responsibility are needed to support and ensure the achievement of the company’s objectives?
- Which management development measures are to be introduced in order to secure and / or expand the required competencies?
- What are the overall conclusions to be drawn and what appropriate measures should be taken to support them?
Finally, it should be emphasised that the overall process is consistently and exclusively oriented towards the concrete, individual challenges facing the company and its management.
In addition, the managers are actively involved from the very beginning, which means that they immediately learn how they can act optimally in order to contribute in the best possible way to the achievement of the company’s strategic goals – and thus to an increase in the value of the investment.
Especially in a tense overall economic environment, it is essential to secure the correctness of investments as resiliently as possible.
With regard to acquisitions, the competencies and potentials of the management in the company under consideration must play a key role with regard to the desired corporate development.
ELC – Euringer Leadership Consulting
Strategic Leadership For Results
Dr. Peter Euringer