Thursday, February 28, 2008

Layoffs after a Buyout

In the world of privately-held companies, when one company buys another, the buyer will almost always try to reassure the seller that no one will lose their job. The seller often has close relationships with the employees, and some of them are probably immediate or closely-related family members. Although this assurance from the buyer is meant to comfort the seller, it is almost always NOT true.

Comparing the number of layoffs in PE purchased firms to a control group, the first and second years after the PE purchase show dramatic increases in layoffs relative to the control group. During year three the difference narrows. Interestingly, years four and five actually see less layoffs in PE purchased firms than the the control group. Several things may be assumed from this study. Logically, when a buyer purchases a controlling interest in the company, often changes occur. A new culture starts to form, disrupting the old way of doing things, and often people feel like they don't in the company anymore. Turnover and layoffs increase for a few years, but then the culture stabilizes and everyone that is left fits into the new firm.
I have personally been involved in PE purchases.

I have heard the PE firm promise that the existing team of the purchased company would not be changed. Inevitably, it does. New systems, procedures, and reporting relationships are introduced. After all, the PE firm wants to help the business run more efficiently and effectively. They bought the company for some set of inherent and intrinsic reasons, usually centered on ways to help the company ultimately become more profitable. There is nothing wrong with selling your business to a Private Equity firm. In fact, it can be a very lucrative exit strategy for a business owner, not to mention the legacy opportunity that comes from a new owner with deep pockets and additional resources to help the company grow and progress. Regardless of what the buyer says, the seller needs to accept the fact that within a couple of years things will change drastically within the company. Some of the faces they have grown to love and appreciate will disappear. The buyer and the seller should consider and even plan for these layoffs to occur as they discuss this transaction.