“Some people, when they learn that two wrongs don’t make a right,
try three. ”
– Author Unknown
ACTUAL “CASE HISTORIES”: For many years I have counseled and negotiated on behalf of employees when their employers (a) are being purchased by Private Equity investors, (b) are owned by Private Equity investors, and (c) are being sold by Private Equity investors. I’ve also represented employees being recruited to work for Private Equity-owned employers, commonly referred to as Private Equity “Portfolio Companies.”
In the course of those efforts I believe I have learned a thing or two about the nature of Private Equity-owned employers, and the tactics they commonly use in employment negotiations. And, though I am a few years younger than he was, as Michelangelo said at age 87, “I am still learning.”
Sure, every Private Equity investor and every Private Equity Portfolio Company is unique. And, too, you can’t paint tens of thousands of people with one broad brush. That said, there are certain commonalities and cultural norms to be found in certain industries, and certain lessons to be learned in reflecting on one’s experience over decades.
On the basis of those decades of experience, I’ve assembled this list of “Eleven Employment Tactics of Private Equity-Owned Employers.” I present them to you in the hopes that, for you, “forewarned is forearmed” (although I have never seen a person with four arms – just kidding!)
I present these thoughts to you so that you are better able to see what is likely coming your way, and more capable and confident in navigating and negotiating your way to success and security at work – the foundational purpose of SkloverWorkingWisdom.™
LESSON TO LEARN: Is it any wonder that Private Equity investors – whose job it is to (a) locate a company to purchase, (b) purchase that company, (c) reduce its costs and increase its sales, and then (d) sell that company, (e) all with one purpose in mind – to make as much money as possible for themselves and their investors – tend to conduct themselves in similar ways? It should not be surprising at all.
Likewise, it should not be surprising at all that those with a short-term perspective, who engage in the buying, exploiting (in all senses of that word), and selling companies tend to act with short-term objectives in mind, not concerned with the long-term consequences of their actions on employees, communities and other stakeholders. Why worry about the long-term effects of your actions on employees, communities and customers, when you won’t be around more than three to five years? After all, “no one changes the oil in a rental car,” now, do they?
As employers of their “Portfolio Companies,” Private Equity managers do all they can to (a) lower overhead, and (b) maximize the company’s eventual sales price – for themselves and their investors. They don’t work for, get paid by, or care much for, others. With one goal in mind – “R.O.I., or Return On Investment” – why would anyone expect anything different?
Know who you are dealing with, and keep a sharp eye out for the “sharpie” Private Equity investors who are quite convinced that their access to large amounts of investment capital is a sure sign that God has anointed them as a segment of the human race above all others.
These 11 employment tactics that Private Equity investors use when purchasing part or all of employers are to be watched out for and to stood up to, as best you can. While there is no guarantee that you will be successful in negotiating with a Private Equity manager, or in resisting the changes they will inevitably insist upon, the more you know the better you will do. That is guaranteed.
Below we present 11 employment tactics of most Private Equity-owned employers, and the best steps we have found to resist their impact. As noted below, one thing you might do, right away, is to consider changing employers, or at least testing the waters, because that is your ultimate response to these tactics: seeking employment elsewhere.
WHAT YOU CAN DO: Keep a sharp eye out for these 11 Employment Tactics of Private Equity Investors:
1. Promises of a Pot of Gold: The fundamental “deal” presented to employees working for a company being purchased by Private Equity investors is this: “(a) Work hard, (b) let us reduce your compensation and benefits, and (c) one day . . . when we sell the company . . . you will receive a pot of gold.” The only problem is that, almost always, the outcome is (a) and (b), but not (c), for a number of different reasons.
For this reason, employees should insist on assurances of item “c,” that is, a share of the eventual “pot of gold” (i) of a minimum amount relative to the company’s senior management, (ii) in all events, even if they are terminated without cause before the “pot of gold” is delivered, (iii) even if one or more financial benchmarks are not achieved, such as “EBITDA” goals.
If you do not expect to receive a promise of shares of stock or other “pot of gold” from new Private Equity owners, and if you feel you are an important part of the team, you might also request a retention bonus or arrangement for staying put until the expected closing three to five years later.
We offer a Model Memo entitled “Model Memo Proposing a Retention Bonus or Arrangement,” to send to your Manager when you believe your Manager would view your departure to be a risk in one way or another. “What to Say, and How to Say It,™ just [click here.] Delivered by Email – Instantly!
2. Beware the Employer-Chosen and Employer-Paid “Group Legal Counsel”: As part of the process of a Private Equity firm buying into an employer, Private Equity investors often seek sweeping changes – and not to the “upside” – to salaries, bonus programs, commission plans, and such long-term employee benefits as (a) employee stock or stock option programs, (b) pensions and deferred compensation programs, and (c) long term compensation arrangements. To gain acceptance for these changes by employees, it is growing increasingly common for employers to arrange for “free” legal counsel for the employees on a “group representation basis.” This can be dangerous. Why? Because the obvious conflict of interest when an employer chooses and pays the attorneys for the employees.
My own estimation of the value of such “group legal counsel” is that (a) to the employees, it is worth exactly what they pay for it, and in fact is often quite harmful to their interests, while (b) for the employer, it is worth a great deal. I have witnessed numerous instances in which the law firm hired by the employers fail to note to employees the many hidden, buried and potential risks built into the legal documents that will inevitably need to be signed, and misrepresents and mischaracterizes both the changes made and their ramifications.
In “small print,” employees are often asked to agree to “waive any conflict of interest” in this scenario, which is to my mind tantamount to “treason” by attorneys. It is always preferable – although not something that employees do – is to hire truly independent legal counsel, or insist that the employer reimburse the employees for legal counsel of their choice.
It is recommended that employees (a) insist upon legal counsel of their own choice, (b) paid by the employer, and (c) choose legal counsel who (i) assist only employees, never employers, and (ii) who are experienced in these negotiations. If denied, employees should give serious consideration to hiring legal counsel of their own choice at their own expense, which can be shared if several employees band together.
3. CEO as “Ringmaster”: It is very often the case that Private Equity investors will approach the CEO (or President) of a company they wish to purchase or invest in, and offer him or her an opportunity to be a significant “partner” of theirs in the purchase, exploitation and sale of that company. Commonly, he or she will be offered a percentage of the profits expected. Alternatively, they may arrange for the hiring of a new CEO as part of their purchase process.
While the CEO’s duties will include running the company, those duties will likely expand to include keeping the employees in their jobs despite (a) lowered compensation, (b) reduced benefits, (c) new and broader non-compete agreements, and often, (d) likely eventual termination through continued waves of workforce reductions. In this sense, the CEO’s role expands in a way no one had foreseen, now to include effectively working directly against the interests of the employees. Right or wrong, it is increasingly common.
As part of this scope of duties, the CEO often presents the operational changes to the employees and argues strenuously – and falsely – for their broad acceptance as “in all our interests.” A healthy skepticism is warranted.
Perhaps the most effective response from employees is to ask that the staff be treated in all ways no different than the senior management, from “salary to sick time to stock.”
4. Plan on Plenty of Peer Pressure: If you are one of the employees who voice concern, ask for independent legal review and advice, and/or seek to honestly negotiate the changes new Private Equity owners seek to institute, do not at all be surprised by Senior Management telling others you are a “spoiler” and encouraging them to put pressure on you to “go along.”
The degree, breadth and intensity of this peer pressure cannot be underestimated. Two things are to be kept in mind: first, you cannot underestimate the effect of fear in the workplace. First, people are understandably frightened about losing their jobs, and losing out on possible financial opportunities. Second, this is an experience most employees have not gone through before, and so are even more apprehensive than might seem warranted.
Both of these phenomena are best addressed by your (i) identifying others with your concerns and dedication to careful review and prudent action, because there is “convincing-ness” in numbers, and (2) maintain a consistently calm demeanor and presentation of your thoughts.
B. Benefit Reductions and Compensation Redesign
5. Benefit Reductions: New Private Equity owners will inevitably insist upon cuts or outright elimination of health insurance, 401k contributions, vacation time and accrual, and the like. This is not something that is easily resisted by individual employees.
I suggest that employees do their best to calculate the aggregate cost of these benefit reductions, and when and how the costs commence. If benefits are available from spouses’ employers, it might be wise to switch over. If benefits are available on the open market, such as health insurance exchanges, or from affinity groups such as AARP and alumni associations, that, too, should be investigated and carefully considered.
Those who believe that their perception of value is significant, or their continued presence is critically needed, it may be a good time to prepare to request assurance they will not be affected, payment for the resultant loss, or an alternative “reward” to make up for these losses.
6. Compensation Redesigns: Salaries may be lowered, accompanied by vague promises or purely discretionary bonuses, instead. Bonuses may be redesigned so as to lower their payout, to delay the payout, or to make the payout conditional. Commission plans are quite often restructured by making payments later, payments conditioned on certain targets being achieved, percentages reduced, or territories changed so that what was formerly “your client” is now a “house account,” and thus pays a lower commission rate. Quite commonly, too, are deferred payments forfeited if the employee “leaves” the employer at any time, even if laid off or downsized.
The law says that an employer – or an employee – can insist upon changes in the employment relation, including compensation arrangements. If the “other side” disagrees, then the two can simply agree to part ways. However, the departure of the employee may just be what the employer seeks in this context, because it may entail a significant forfeiture of previously-earned monies.
Regarding compensation programs, in this context we suggest that efforts be made to secure (a) commission percentages, (b) sales territories, (c) continuation of commission flow in the event of non-cause termination, (d) partial bonus payment in the event of non-cause termination, and similar compensation protections before Private Equity owners arrive on the scene.
If your employer is going to get new Private Equity owners, you can proactively request protections be put in place to protect you from probable changes. We offer a Model Memo to Managers Seeking Protections When Private Equity Investors Approach Ownership. “What to Say and How to Say It.”™ To obtain a copy, just [click here.] Delivered by Email – Instantly!
7. Watch out for what I call “EBITDA Evisceration.” Many bonus, stock and profit–sharing plans are calculated according to, or conditioned upon, a specified level of what is called “EBIDTA.” “EBIDTA” is an accounting acronym that stands for “Earnings Before Interest, Depreciations, Taxes and Amortization.”
A very common ploy of new Private Equity owners is to severely depress EBIDTA by (a) having the company borrow huge sums of money to repay themselves the money they borrowed to buy the company, making their “investment” not a cost to them, but rather a new, hefty and unnecessary burden on the company. This serves to depress earnings and lower EBIDTA. If your bonus, stock grant, profit sharing or other compensation is EBIDTA-dependent, you are less likely to get what you deserve, or any of what you deserve, by this “financial chicanery.”
If your bonus, stock grant, profit share or other compensation is EBIDTA-dependent, ask that (a) a different metric be used to calculate your compensation, or that (b) EBIDTA be calculated without reference to any new borrowings or additional debt service.
If you are considering seeking employment elsewhere, do your best to (a) time your departure so as to collect what is due you first, (b) consider asking your next employer to cover your losses as a kind of “sign-on bonus” or as part of your overall compensation package, or (c) attempt to achieve timing of resignation and new employment in as smooth a fashion as possible.
Resignations can be tricky – and treacherous. To help you, we offer a 100-Point Master Pre-Resignation Checklist. All you need to know and remember. To obtain your copy, just [click here.] – Delivered by Email – Instantly!
8. Phantom Consultants and Outsized “Management” Fees Also Reduce Earnings: A rather common way new Private Equity investors commonly collect for themselves financial resources from their portfolio companies is to “hire” themselves or their affiliates as high-priced “consultants” and “managers” to “oversee” the company that did quite well even before they arrived. These fees are often unnecessary, and commonly quite considerable, and at times put crushing pressure on employees to produce more revenue, reduce overhead, and at times resulting in aggressive – even risky – business practices, elimination of needed regular maintenance of buildings and equipment, and delays in needed software updates.
Such fees, of course, lower EBITDA, too, and thus are likely to reduce employee bonuses, employee profit sharing and employee stock grants that are conditioned upon the company’s financial performance.
Once Private Equity investors take over company management, they are free to do as they wish regarding hiring and payment to consultants and the like. For this reason, there is not much employees can do other than factor such practices into their expectations of their own compensation if it is conditioned on, or calculated according to, company performance.
If you are considering leaving the company for any reason, instead of an ordinary resignation, why not consider an “involuntary resignation,” citing as your primary reason for leaving the new Private Equity investors’ paying themselves for what seems “no show” or phantom jobs? It is always a matter of great sensitivity, and thus leverage, when resigning in this circumstance. Consider reviewing our newsletter entitled, “Involuntary Resignation – Standing Up, Not Giving Up, When Leaving Your Job.” Just [click here.]
For those who would like to present an Involuntary Resignation, but don’t know “What to Say and How to Say It,™” we offer a “Model Involuntary Resignation” letter that you can use. To obtain a copy just [click here.] “What to Say and How to Say It”™ 24 Hours a Day. Delivered Instantly by Email – Instantly.
9. Quite Often, Indecipherable and Insufferable: One thing I must salute Private Equity attorneys for: their ability to create overly lengthy documents, with overly complicated definitions and overly incomprehensible terms and conditions, with an overabundance of “discretion”-related “trap doors” through which company management can later defeat efforts to secure or collect promised compensation.
Attorneys who write clearly are honest, and have nothing to hide. I honestly believe that the overall reason attorneys write with the clarity of mud is that they are not being honest, upfront or open about what it is they – or their clients – seek, or seek to hide.
The best way to deal with this kind of lawyering is patience and perseverance, and using an attorney who is experienced in such matters. The best responses are clear, and comprehensive ones, beginning with language like “Regardless of anything expressed elsewhere in this agreement, . . . ”
Perhaps the most important negotiation request is that (a) all payments earned and (b) all equity vesting contemplated, will take place in the event of an employment termination by the employer without “cause” by the employee.
10. New or Expanded Non-Competition Agreements: The entire Private Equity industry is founded on the central idea of “(1) buy the profitable company now, (2) make it look financially prettier, (3) sell in 3 to 5 years.” One part of that plan is “If the employees are tied up with broad and harsh non-competition agreements, and thus less likely to depart after the sale is completed, then potential purchasers will be more inclined to pay a higher price.”
It is for this reason that, without notice, many new Private Equity owners of companies require that the company’s employees sign a new, stronger and more distressing non-compete agreement, as a pre-condition to keeping your job.
It is always a good idea to do your best to resist, restrict or reduce the non-compete you are required to sign.
When asked to sign a non-compete agreement, consider asking for release from it, or modification to it, in order to protect your career. How can you respond? How should you respond? Our “Model Letter: Response to Request You Sign a Non-Compete” shows you “What to Say, and How to Say It.™ To obtain your copy, just [click here.] Delivered by Email – Instantly!
11. The “Signature-Page-Only” Ploy. “Here, sign this page, and give it back to me in an hour. What do you mean, you want to see the entire document? The lawyers are working on it as we speak. If you don’t trust me, well, maybe you shouldn’t even be here.” Or, a common variant: “This is a draft; the final version will be exactly the same.” What chutzpah!
That ploy or ones like it are simply to be resisted. When you and your attorney have reviewed (a) the final document, (b) the complete document, and (c) all of the documents, because one might affect another, then and only then should you sign any document. Prudence never goes out of fashion and always pays off in the end.
Don’t be intimidated. Don’t be pushed around. Don’t be foolish. All adults are expected to read everything they sign, without exception, and should have an attorney do so, as well. Only a fool fails to do so. And you know what these same Private Equity employers will say in the future: “You had every opportunity to read what you signed before you signed it.” Or, perhaps, “Where was your attorney when you needed her?”
These 11 Negotiation Tactics of New Private Equity Owners represent experiences and observations over more than a decade of helping employees in these circumstances. They constitute important information and insight with which you may empower yourself in an employment situation where empowerment is crucial. Fairness and protecting yourself, and your family, with information and insight: that’s what SkloverWorkingWisdom™ is all about.
P.S.: If you would like to speak with me directly about this or other subjects, I am available for 30-minute, 60-minute, or 120-minute telephone consultations,. just [click here.] Evenings and weekends can be accommodated.
SkloverWorkingWisdom™ emphasizes smart negotiating – and navigating – for yourself at work. Negotiation of work and career issues requires that you think “out of the box,” and build value and avoid risks at every point in your career. We strive to help you understand what is commonly before you, and know what to “watch out” for. Now, the rest is up to you.
Always be proactive. Always be creative. Always be persistent. Always be vigilant. And always do what you can to achieve for yourself, your family, and your career. Take all available steps to increase and secure employment “rewards” and eliminate or reduce employment “risks.” That’s what SkloverWorkingWisdom™ is all about.
*A note about our Actual Case Histories: In order to preserve client confidences, and protect client identities, we alter certain facts, including the name, age, gender, position, date, geographical location, and industry of our clients. The essential facts, the point illustrated and the lesson to be learned, remain actual.
Please Note: This Email Newsletter is not legal advice, but only an effort to provide generalized information about important topics related to employment and the law. Legal advice can only be rendered after formal retention of counsel, and must take into account the facts and circumstances of a particular case. Those in need of legal advice, counsel or representation should retain competent legal counsel licensed to practice law in their locale.
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