Two West Coast privately held printing companies are engaged in early stage M&A talks. The chemistry among principals seems pretty good (as evidenced by taking turns picking up the lunch tab). The strategic fit appears excellent, with approximately $8.0 million annual sales of sheet fed offset printing that could be manufactured in the partner's infrastructure, thereby creating huge consolidation savings that generates profits and cash flow to make the deal successful for both parties.
But the killer issue lying in the weeds is disparate sales comp plans.
One company in these M&A talks has a value added sales comp plan that equals 5% of gross while the other company offers its sales people commissions of 9-10% of gross sales. 80% of the sales from the company that would be "tucked into" the partner's infrastructure are generated by sales people who would be "overpaid" relative to the sales team that is in place at the "surviving company".
Possible outcomes and implications are:
- Sales persons of the $8.0 million sales company would have to take a big pay cut to stay in the combined company (not very likely);
- The combined business would have two very different sales comp plans (not good for morale, big risk of alienating existing sales team);
- The consolidation savings may have to fund the disparity to even out the comp plans until a new one is created (a possible outcome if both sides want to make this deal work).
What are the "lessons learned" here?
Ask the question about sales comp plans very early in M&A talks, as this could be a deal killer issue that may suggest "not a good fit and let's move on before spending much time on this".
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