To PEO or Not to PEO in M&A Transactions | Deloitte US has been saved
Posted by Andrew Heller and Jennifer Zheng on July 21, 2020.
Companies engaged in mergers, acquisitions, divestitures, or restructuring activities face highly complex strategic and operational challenges. To effectively navigate these challenges, back and front office functions should choreograph critical decisions with limited time and data. Such decisions are the cornerstone for the success of an mergers and acquisitions (M&A) transactions, as they impact the overall risk profile for these corporate life events. PEOs can help businesses reduce the risk and accelerate the timeline.
When deciding how to structure a transaction, decisions made by the leadership and corporate development teams likely have HR, finance, IT, legal, and tax implications. For example, if acquiring a business that has operations in a country with a small employee footprint and no existing legal entity to absorb that business unit, what options exist? Does your business have enough time, structure, and/or budget to quickly set up employment via a legal entity or other structures (e.g., branches, representative offices)? Does the business have the infrastructure to support hiring, processing payroll, providing benefits, and supporting other HR activities in that jurisdiction? What if your business is trying to establish operations in a country that is not granting new business licenses due to the current pandemic situation?
When faced with such questions, many companies—regardless of their size and footprint—consider engaging with PEOs for support. Depending on the overall circumstances and business needs, PEOs can be a highly effective option to promote speed of execution and reduce the complexity of the transaction.
So, what makes PEOs an asset in the M&A space, and what should leaders watch out for when deciding to PEO or not to PEO?
PEOs are specialized companies that provide various HR services to their clients, including payroll, benefits (through pre-negotiated benefits plans with insurance companies), workers’ compensation, and HR compliance. In addition, PEOs have established legal entities, company IDs, and payroll registrations in various jurisdictions around the globe, removing common tax and legal barriers to help companies complete M&A transactions on an accelerated timeline. In order to do so, clients must enter into a specific co-employment agreement with the PEO, resulting in the PEO being the employer-of-record in the applicable country.
PEO levels of service and offerings have increased to match market demands of more robust and technologically advanced solutions. Note that services below are now always included in the ‘out-of-the-box’ or standard contract; some PEOs may charge an additional fee to support specific HR processes such as recruiting, selection, and enhanced talent management (e.g., job postings, compensation, and job benchmark analysis, applicant tracking solutions).
PEOs should be considered by businesses engaging in domestic or international M&A to support reducing the overall transaction risk profile, including:
By leveraging a PEO for the reasons above, leaders can focus their time and resources on strategic priorities tied to the success of the transaction, like business development, cultural integration, and talent retention.
Deloitte can advise organizations consider legal entity, employment, and tax strategies, including PEO solutions for applicable markets. We have in-depth knowledge of how to strategize, identify, implement, and exit a PEO model, and cross-functional insights re HR, finance, IT, and tax implications. See the approach below, which highlights key activities throughout the complex process.
Andrew Heller is a managing director in Deloitte Consulting LLP and has more than 17 years of industry and consulting experience focused on leading HR workstreams across the M&A or restructuring lifecycle during due-diligence, Day 1 readiness, post-merger integration, and transformation planning/execution.
Jennifer Zheng is a senior consultant in Deloitte Consulting LLP’s Human Capital M&A and Restructuring practice, supporting clients from due diligence through post-merger integration in M&A transactions and divestitures.
1 Each PEO will offer different services so this is not an exhaustive list. However, most PEOs will still require you to manage some processes in-house including executive compensation, compensation plan administration, board of directors and executive compensation committee; sourcing and selecting candidates; succession planning; disciplinary and termination decisions.
2 Source: Deloitte Consulting LLP, 2020.
3 US only.
4 The information and considerations listed below are not legal advice. Please note that the appropriate legal, regulatory and tax advice should be considered before deciding on legal entity set-up.