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Structuring Talent Focused Acquisitions

“We've got to keep people motivated and happy. Money and handcuffs alone aren't always enough to keep people around.” - Christina Ungaro

On this episode of M&A Science, Kison interviews Christina Ungaro, Head of Corporate Development at JLL. Together they discuss how companies should structure talent-focused acquisitions, breaking down exactly what that kind of transaction requires and entails, the necessary diligence, and how to make these deals successful

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Christina Ungaro

Episode Transcript


I am Kison Patel, CEO, and Founder of Dealroom. Joining me today is Christina Ungaro, Head of Corporate Development at JLL. She is a corporate and business development leader with proven success in helping companies transform and grow through acquisitions, divestitures, investments, joint ventures, and partnerships.

One of the values in doing an acquisition is an opportunity to enhance or level-up an organization’s talent. In this episode, we are discussing how organizations should structure talent-focused acquisitions.

Can you describe your role in your organization?

I am currently the Head of Corporate Development at JLL. I oversee all of the mergers and acquisitions execution in the Americas region. JLL stands for Jones Lang LaSalle and we are a global commercial real estate services and advisory firm.

We provide brokerage and sales advisory, project management consulting, and outsourced facilities management. We are not generally a developer or owner of real estate, we advise clients on their real estate matters.

What is a talent-focused acquisition?

A talent-focused acquisition is largely a services-based acquisition. It is a situation where you are acquiring people for their skills, their domain expertise, particularly in the areas of consulting, advisory, and client relationships, and especially in the areas of brokerage.

Because JLL is a services-based organization, most of the acquisitions we do are talent-based, but we are also on our digital journey, looking at some technology-based plays as well.

What are the key criteria in assessing an investment in a talent-focused acquisition? Can you describe how you would do the diligence?

When we look at a talent-focused acquisition, we are looking at a lot of the same things we would for any other acquisition. However, what makes it more unique is that we are digging in on understanding the employees and the culture.

We are particularly attracted to situations where the employees of the firm are also the owners of the firm and there is a really strong alignment there which enables us to do some things with the purchase price and earn-outs to create incentives going forward. 

We also want to look at how committed the employees are, not just to a sale, but also to continue on as employees in JLL post-closing.

It is also important that there is a good training and development model in place because not everybody is going to be there forever and we want to make sure that there are appropriate processes in place for knowledge sharing and training.

How do you approach planning the structure and valuation of a deal?

Recognizing that the value is in the employees, the biggest risk is that you do the acquisition, and then as soon as you close everybody leaves and you are left with nothing. That’s the risk that we are always trying to minimize in how we structure the deal.

From a valuation perspective, we still employ a very revenue and cash-flow based valuation methodology, but how we structure that valuation is going to be different for a talent-based deal.

We tend to purchase price over time rather than all at once, and we use earnouts quite extensively. We also use time-based and performance-based retention compensation models. 

Do you have any tips on how to make an earnout successful?

The way we structure earnouts has evolved and the biggest area of involvement has been making sure that we are holding the acquired business accountable for things that are in their control.

You have to find a way to integrate, but also ring-fence the business at the same time, and making sure that the earnout is in line with what you want those employees to be focused on.

Are there ways in which building a talent-focused structure could be leveraged in other industries?

Absolutely. I think talent-based M&A is applicable to any professional services or business services firm, consulting firms, advisory firms, interior design, architecture, you name it.

We frequently see software companies and technology firms acquiring talent, but the distinction is that in business services you are acquiring that talent for exactly what they are doing today, whereas in the technology world you might acquire that talent and redeploy them to other projects and it is a way to get access to development skills. 

What does that mean in terms of repurposing the team that you are acquiring for different projects?

In the technology world, it is often an acquisition of a team and maybe some intellectual property. The acquirer will often either scrap that intellectual property completely or take it and build it into something else that they are building internally as a way to accelerate development.

The team may not continue to work on that IP and they may continue to work on something bigger. 

If you are not going to utilize IP, are you putting weight on that in your valuation?

In those situations not so much. You are going to be looking more at hiring costs as your opportunity costs and then the deal structure itself is going to be more heavily weighted towards retention. These deals are usually very focused on an acquisition of just the talent and retention around that going forward. 

In what ways does the talent-focused organization have to change their processes and adapt?

The most important thing is to keep an open mind and be willing to learn from the organizations that we acquire, botch culturally, and operationally. There is a reason why we are attracted to the firms that we acquire.

We have to be open to adapting our methods and our business model in a way that incorporates the best practices of both firms so we can constantly evolve. For example, they may bring a new way of managing the sales cycle, the CRM process, or contract with clients in a new way. 

How do you drive that? You have the right view and the vision around it, but when it comes to execution, how do you align other team members to think that way?

You’ve got to narrow it to what you can and can’t change. It’s really about keeping open lines of communication with the acquired team and giving them the autonomy to continue doing things that were proven to be successful.

How do you think about synergies in the context of a talent-based deal?

Synergies in a talent-based deal are a bit unique. On the cost side, things are a bit more traditional, where you look at things such as back-office efficiencies. The revenue side is trickier.

In a software transaction, you acquire a product and you can sell it to your existing distribution channels and see an immediate uplift in sales. You can’t do that in the service’s acquisition.

The only way to scale services is to add more people or make them more productive. We try to do both and look for opportunities to engage our people in cross-selling, educating them on other JLL products and services and sell those into their client relationships and vice versa.

It’s all about leveraging each other’s clients, trying to expand wallet share with those clients, and then, as the business expands and grows we have to add headcount. This is why we do earnouts. 

Does the accountability ultimately fall back on that acquired leadership team? Are there other areas in your organization where that accountability is going to lie?  

It’s a mix of both. Most of our acquired teams do maintain some level of autonomy in how they operate and they do have accountability. However, they are also part of a larger business line or organization and those leaders have accountability as well, particularly on the cost side. 

How do you keep these synergy assumptions realistic and attainable?

We’ve got a pretty good body of knowledge at this point as to what we were actually able to achieve on those transactions, versus what we thought we were going to achieve. We tie a lot of earnout to hitting synergy cases, we are not paying for it until it happens and by large we’ve been pretty conservative on the synergy.

Are there any areas you would see that potentially would be the areas that are the toughest or tend to fall short when you are driving synergy values? 

It’s tough to measure cross-selling. We have some internal incentives in place to drive that behavior and people can share in each other revenue streams when they cross-sell with each other, but it just doesn’t always happen or get reported. Sometimes the synergy is there, but it’s hard to measure and put a number around it. 

What are the actual steps of a talent-focused acquisition?

In general, the steps are very much the same as any other acquisition. What is unique about talent-based deals is where we spend more of our time.  The long poles in the tent for us are the sourcing and evaluation of a potential opportunity that can be very extensive dialogue with the target to determine if it’s a good cultural fit and if they share that vision as well.

Where we also tend to get hung up in lengthy negotiations is negotiating finer details of earnouts, retention, employment agreements, and non-competes. A non-competition agreement is part of any acquisition, but in talent-based deals, it is very personal.

Those get very detailed, very personal, but they are also very critical because we are providing value for that person’s talent and commitment, and we have to get that commitment in return. 

Would a non-compete help lower flight risk?

Absolutely. These are pretty heavily negotiated. There are ways to get out of them on both sides, but it helps flight risk. A non-compete and incentives go hand in hand to ensure performance post-closing. Ultimately we got to keep people motivated and happy. 

I assume you are extending some form of contractual agreements with the key people that you want to retain?

Yes, we do employment agreements. The last ingredient is shaping a role that the individual is excited about, allowing them to lead, giving them accountability and ownership. That's often the most important element of the overall package for the sellers. 

Can you walk me through it? How do you frame that as something exciting?

We don't do a lot of pure consolidation M&A. Most of the talent that we acquire is talent that we don’t exactly have today. When we are bringing acquired teams, we often can give them ownership over their domain. 

In cases when we are combining them with another team, even in those cases sometimes we’ve given them the ownership over the combined total. We make a lot of acquisitions where we are lacking leadership in a certain market and we are using the acquisition to go out and get that leadership. 

Do you ever get some resentment around title changes?

Titles are of varying importance to different people and our title structure is never going to correlate to everybody else’s title structure, so that is always a negotiation, but we are usually able to work things out on that front.

The trickier parts are when we are bringing a team in and there is already a team there, so we need to get those teams to work together. Sometimes it doesn't always work out for every single person in the equation, but we generally try to bring in teams that are a good fit from the beginning. 

How do you plan for what competencies you’ll need in 12 months?

We have a lot of different services and capabilities that we offer where we are falling short, and that becomes a part of our strategic review process. Our executives meet quarterly and then, more frequently than that, on a more formal basis constantly to review where we have strengths and weaknesses and where our strategic priorities need to be. 

What are those key characteristics that define culture fit?

Culture is about so much more than corporate values or personalities. It extends into the organization in terms of how each company does business day-to-day.

How do we contract with our clients, maintain relationships, or resolve an issue with a client or internally? Who is making decisions? Do we have a consensus-based culture or more of a command and control culture?

Those are the things we want to understand as we are doing cultural diligence and that is going to require more than just talking to the CEO. 

The CEO and the C suite are going to have one view, but two layers down it’s going to be a different story potentially. We try to go a layer or two down. We can see how they operate by how they run their financial process, reporting, and forecasting, how they conduct their marketing or HR processes.

For us, cultural due diligence is almost a layer that hangs over every element of diligence because it is going to shine through in every interaction.  

What are some of the titles that you’d want to speak to?

We want to talk to not just the CFO, but also the Director of VP in finance, the person who is doing most of the work in working with the systems day to day, somebody in the trenches.

Functional leaders or functional leaders number two can be helpful. Also, if we are looking at a firm that has more of an infrastructure around sales or customer support we want to talk to some folks there as well. 

You are not looking at cultural rituals. You are looking at the way they deal with issues and make decisions.

Absolutely. We’ve, in certain cases, also asked how do you conduct your annual review process? How do you determine compensation? How do you determine bonuses every year? For some of the key talent that we are going to put retention out to, we might ask for their performance reviews in the last couple of years. 

Tell me about the time when you walked away from a deal because of bad cultural fit and why?

There have been several situations, we’ve met with some other firms for consideration for acquisition where it was not as collaborative of culture as ours. If we’ve read some concerning things on Glassdoor that made us pause too.

Sometimes our interactions with the CEO or the owner are not good. In most situations, we've walked away earlier, before we got too deep into a process. 

What are some challenges you may face in talent-based acquisitions?

The biggest challenges we face are around earnouts. If we are putting out a certain value for a firm we are gonna try to get a payback on our investment or at least some return. Within 5 years, we try to map a non compete in a similar time frame. Sometimes it takes 5 or 7 years to bridge the gap on valuation expectations.

You have to anticipate how the business is going to look like five years from now and anticipate any potential reorganization or build some flexibility into the agreement around unanticipated things. It can be even harder to measure these earnouts going forward, especially when people are constantly churning throughout the organization.

Do you do share or asset deals? If you do weather of these, which one do you typically lean on? Would earnouts impact that as well?

We typically lean towards asset deals, but we’ve done share purchases as well. You can use an earnout structure in either. The thing to remember is that earnouts have to get paid out in the same way that all the other purchase prices are paid out. It’s gotta match the cap table.

We look for reps and warranties in our purchase agreements to assure that earnout consideration is going to be treated just like all the other purchase considerations.

Do you have a playbook for synergies, a standard set you look for?

Although it's not written anywhere, there are synergies that we look at over and over again and synergies that we are trying to avoid. 

Who's got the biggest influence when it comes to synergies? You can have some coming from the target company, and different ones coming from your organization. 

In most cases, JLL has the most influence in bringing synergies to the table because most of the time we are acquiring a firm that’s much smaller than JLL. We are bringing a lot to the table with our platform and client base, but small firms bring synergies too.

Every deal we do has a sponsor internally, so it’s typically that sponsor and their team helping us estimate what synergies are going to be and where they come from. 

How have you seen the current environment impact these kinds of deals?

It’s impacting current deals that are still integrating and moving through their earnout periods. A lot of areas of the market have seen a big slowdown and we’ve seen a slowdown in parts of our business where we’ve done some acquisitions in the past.

It’s challenging for firms that are trying to hit their earnout targets and they may be derailed altogether in hitting those targets, which feels unfair. 

We’ve been very cautious about undertaking new M&A in this environment. There has been a lack of visibility in terms of where the industry is going to be over the next 6 to 12 months. We are always on the lookout for attractive, well-capitalized opportunities and well-positioned to move quickly if something compelling comes along.

Some companies that have demonstrated resilience over the last six months that things didn't fall apart, those are going to do very well in a sale process. There's going to be some distressed asset sales coming out of this period as well. What’s the craziest thing you’ve seen in M&A?

I remember one transaction I worked on where the sellers were very insistent that we keep getting that fruit basket delivered every Monday morning to their office. It was like a cultural symbol of giving, so we committed to that in the purchase agreement. 

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