Don’t forget the human side of carve-outs

Sometimes you can get so focused on the nuts and bolts of a carve-out that you can overlook the very human element of the deal: your HR.

Claudia Poernig, Managing Director of DLA Piper’s International Corporate Reorganization practice, has seen it happen many times.

“In my experience, I find this is very challenging and it can take a lot of time,” Claudia says. “Client’s need some sort of interim period to focus on this, or they’re not ready for prime time.”

In those years of experience leading M&A and carve-outs around the world, Claudia has seen recurring HR challenges, all of which could send the deal south if not dealt with effectively.

You can read about this aspect and more in our free eBook - M&A and Carve Outs from A to Z.

Risk one: how will you transfer employees?

The business unit set for carve-out has employees working in it, and how they transfer to the new entity will depend very much on where they are based and the nature of the carve-out deal. You may be facing a TUPE transfer (Transfer of Undertakings (Protection of Employment) Regulations), or you may end up terminating all staff and re-hiring them in the new entity. Neither is straightforward, and there is risk every way you look.

Remember: you need employees ready, or your first day of operations will be a quiet one. And you need to be able to pay them, or they won’t stick around to help you grow.

“I see a lot of problems with HR,” says Claudia. “When I want to separate a business into a new entity, I have to make sure the new entity is ready to employ on day X. In a given country it may need to be registered as an employer, it needs bank accounts, it needs a payroll system - you need to be ready for prime time.

“I think a lot of times people underestimate what needs to happen when it comes to employees, especially in highly regulated countries. Somewhere like China, for example, establishing and running payroll might be very difficult for you to sort out from HQ, so you’ll have to outsource it. Then you need to find a trusted provider who can do that for you and who can help you set it up.”

Risk two: dealing with organized workforces

Those leaders of workforces with strong unions or Works Councils are unlikely to forget these very important players, but you do need to make sure you communicate your carve-out intentions to them sooner rather than later - in some countries, they may even be able to veto the deal.

“Communicate with your works council very early on because otherwise you might not have a chance to implement on time,” says Claudia.

“The deal might not trigger any changes for the workforce - it could even be beneficial for employees - but when a Works Council hears ‘we’re going to sell a business unit’, their job is to be suspicious. In some cases, they may even have a say, or need to approve the deal. So communication is very important.”

At the end of the day, if you’re wondering if you should notify the Works Council about something, you usually should - just in case.

Risk three: what about the benefits packages?

One thing is guaranteed in HR: mess with a benefits package, and there will be hell to pay. You’ll need to examine the benefits package both current and intended to ensure there’s no degradation of entitlement - and if there is, you need to have your messaging right.

Claudia gives the example of pensions: “The pension might be with the overall holding company, not the new entity or buyer, so you want to make sure that vested employees keep their benefits when transferred and you make clear which entity need s to fund the pension going forward. There’s a lot of calculations involved, and accruals - the numbers game. Make sure you work with a pension specialist who can oversee that transfer of benefits.”

Then there’s the holidays, the bonuses, the health cover… Ensure your talent attraction and retention is considered an integral part of the carve-out deal.

Mitigate risk: work with a trusted partner

A carve-out is not something you can do alone. Risk is at every turn, and there are a lot of variables - especially when working on a global level. Ensure you have a trusted partner who can not only help with the legal entities and structuring, but who can advise on the best set-up for your accounting, HR and payroll, and compliance needs.

Need more information? Download our free eBook - M&A and Carve Outs from A to Z or make an enquiry with our expert team.

TMF Group’s QuickStart: to Carve-Outs makes it quicker and easier to form global, compliant and fully operational NewCos following a carve-out. Discover more.

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