Beyond the Transaction: Ensuring Long-Term Success in Retail M&A

In the past year, the retail industry has witnessed an unprecedented surge in mergers and acquisitions (M&A), exceeding $100 billion in total activity. As we begin 2024, it's forecasted that we will see an explosion in M&A activity. Retailers are strategically engaging in M&A for multiple reasons, from international expansion to increasing market share, expanding brick-and-mortar presence and streamlining internal operations.

In this dynamic environment, retailers must navigate the challenges, complexities and risks involved in the M&A process. Some of these risks include omissions of material information, conflicts of interest, issues of reputation and character, verification of credentials, or past criminal activities. To safeguard business interests, investments and reputation, an in-depth review and investigation of a business and its high-level employees should be an integral part of all investment deals. This proactive approach helps identify potential red flags promptly — especially those related to key executives and company financials.

The Crucial Role of a Background Screening Company

Enlisting a reputable background screening company early in the M&A process is paramount for success. These organizations play a vital role in navigating the complex and often public nature of the process and can assist in looking at deals more closely and acting as liaisons with the integration teams.

Every deal looks different, but there are common steps to determine if a screening provider is needed, as well as how to select the best one for the companies involved. Background screening providers can help retailers involved in M&A by:

• Offering invaluable benchmarking capabilities, showcasing how similar companies in the industry have approached background screening as part of the M&A process, particularly related to cost, turnaround time and candidate experience.
• Determining how to roll out the screening program, whether it be regionally, nationally or globally. Many retailers are looking to enter new global markets, so it’s important to partner with a provider that can streamline international background checks in most countries, as well as offer foreign language capabilities.
• Providing assistance with post-employment screening programs, including but not limited to conducting motor vehicle record monitoring for retailers with driving positions and criminal monitoring for employees who may need to enter customers’ homes.
• Conducting due diligence investigations on key executives to determine the risks associated with entering into a business partnership, investment/loan, or any type of business deal.

The sooner background screening providers are looped into the developing deal, the better they can position the merging organizations for success.

Beneath the Surface: Uncovering Retail M&A Realities

The due diligence and executive investigation approaches are crucial in M&A and go beyond core background checks. A core background check is meant to help employers make an informed selection on job candidates by determining their criminal history and verifying their education and employment history. Due diligence investigations seek to take this one step further and uncover information not disclosed by a subject or a business entity. They paint a full picture for your organization and allow for more tools in order to provide you with a full story.

Issues commonly uncovered include civil litigation cases impacting the acquiring company, securities violations posing legal and financial risks, OSHA violations affecting workplace safety, and the significance of uncovering offshore funds and ties. These investigations can bring to light hidden secrets lying beneath the surface.

Learning From Others

One multinational corporation Sterling worked with learned a valuable lesson before it enlisted our services during its own M&A process. Its existing, in-house vetting protocols failed to identify a company that had been hired to transport fuel in the U.S. Subsequently, that company later stole $6 million worth of gasoline — emphasizing the need for a systematic approach to due diligence. A full due diligence process could have proactively uncovered prior litigation, criminal records tied to the company and its executives, as well as potential adverse media coverage that could affect brand reputation.

As the retail sector experiences a surge in M&A, the critical need for thorough background screening and comprehensive due diligence becomes evident. The financial and reputational risks inherent in M&A transactions emphasize the need for thorough evaluations, with a specific focus on key executives and company finances.

Early engagement with a reputable background screening provider proves essential in navigating the complexities of these transactions. Prioritizing the process should be a fundamental element in all organizations' procedures to safeguard integrity and ensure sustained success in this ever-evolving retail landscape.

Joy Henry is the head of Sterling’s technology and business services group, where she holds responsibility for the P&L of the financial services, retail, gig, staffing, diligence, technology, media, entertainment, and hospitality practice areas of the business.