Tight labor market? Bad economy? It’s the perfect time for an acquihire, the practice of buying a company to benefit from its workforce.

I say it’s a recession. Others say a recession is coming. But we all agree that for the last five years, it has been a challenge to hire qualified labor. That was true five years ago. It remains so today. As the economy stalls and labor markets loosen, the best employees won’t be laid off. They won’t be made available for you to hire.

George, the former owner of an insurance company near Leominster, tells me that he’s already seen a significant drop-off in premiums in this tough economy. Fewer business formations mean fewer umbrella and key-man insurance transactions.

Home sales have fallen off a cliff, so fewer people need liability and homeowners insurance. Overall, George’s company saw transaction volume drop nearly 15 percent year-over-year at George’s company. However, due to inflation and higher labor costs, expenses are up commensurately. Once upon a time, George would have immediately “right-sized” the company and laid off workers. But not this time. Employee-hoarding is a new phenomenon.

Owners remember how tough it was to manage without a complete workforce. George and others who hold onto their employees will be better prepared when the economy turns back up. That doesn’t help other employers who need those workers. And it certainly didn’t favor George’s profit margin, which was getting squeezed to zero for who knew how long.

As inflation rises, so have interest rates, pushing business valuations lower. It’s a good time for you to invite your favorite competitor to a cup of coffee and offer to do for them what George was longing for — someone to buy his company and keep his staff employed. It’s called an acquihire.

An acquisition is a process of taking over an entire company, including employee relationships. Let’s face it — our interest in buying a company drops considerably if the workforce isn’t solid. You might have a financial interest because the company being bought is spinning off cash flow. Or maybe you want access to their product line, technology, distribution or client list. But often, the most strategic value comes from acquiring the people.

An acquihire is a subset of an acquisition; a takeover focused on the employees. (In the strictest sense of the definition, an acquihire only targets the employees; I’ll expand that definition to be more practical). Even during the best labor markets, an acquihire saves the otherwise necessary time and capacity required to recruit and onboard new employees.

That’s not to say you can’t also benefit from taking over a client list, products, trucks, or machinery. But in this environment, the beauty of an acquihire is that economies of scale will allow you to do more with the combined workforce than the two companies were previously doing separately. That’s the sales pitch — let’s do more together. The seller can go out on a high note that he might not have otherwise been able to hit on his own.

For instance, assuming the two firms are not identical in every way possible, one of you will be better at executing workflows and processes that allow for more superb manufacturing, delivery, and client service efficiencies. Or maybe the two sales teams collaborate to share the best pieces of their script. Or maybe one of the companies has a marketing funnel to provide more leads to the salespeople at the other company. The likelihood of you selling the exact same thing is remote. Your expanded product line will allow more market expansion as the increased product line will attract new customers.

Every company has its strengths and weaknesses. George is old-school basic block-and-tackle. His company had an excellent sales culture. Finding and closing the deal is in the DNA of each employee, including operational staff. However, he lacked database management, tracking of key performance indicators, and innovative solutions.

For example, George’s team was good at knowing whether a new company would open but not when it was going to open. That’s a data weakness; George’s team was great at getting to the prospect and pitching, but they were not the first to have that opportunity.

George’s team is silver-tongued enough to win that business often, so long as their products are on an equal playing field. However, George found that he had lost some of the sales to Matt, a competing insurance company. Matt offered the same insurance as George, plus some tax avoidance techniques.

George and most of his competition might provide professional liability and workers’ compensation insurance. However, Matt would also offer defined benefit plans.

According to my book, “Don’t Run Out of Money in Retirement: How to Increase Income, Avoid Taxes, and Keep More of What Is Yours”: “A defined benefit plan can be either a cash balance plan or a pension plan. Participants in a defined benefit plan can contribute up to $230,000 per year in 2021. Instead of paying taxes on $2.3 million over the next decade ($230,000 × 10 years, assuming no increases), you put that money into a retirement account. A business owner and a spousal employee can “front load” a contribution and protect nearly $900,000 of income.” Why only buy insurance when you can avoid taxes, too?

But George wasn’t losing all those sales; his team was good at closing deals. Matt’s team, however, was comprised of high-level nerds (meant in the most complimentary way) that talked way above the heads of the prospective clients, often leaving them with more questions than answers.

Matt’s team was too smart for their own good. You can see how the two would be better — the nerds creating solutions and the salespeople closing the deals. George saw that 1+1 could equal 3; he called Matt and arranged to be bought out. Now George is letting someone else pay the bills, is collecting a study salary, and monetized his life’s work.

You could look at websites like BizBuySell or Loopnet to see who is actively selling. But that’s not your best bet. The companies who list on these sites aren’t typically sophisticated sellers.

The good news about that is you can negotiate some good terms. The problem is that those sellers don’t do a good job planning to sell and they themselves are often the workers with the highest skill level.

For example, a Berkshire County CPA practice is for sale on one of those sites. I offered all cash for the asking price ($585,000). The owner declined because she wants out now, but I needed her to stick around for a couple of years as I transitioned.

Your best bet is to call your competition directly, tell them your intention, and ask to meet. Those potential sellers are more likely to want to sell and stay, providing you with top talent.

And your call could be timely. With the economy bad and getting worse, your offer could boost the seller with the extra help and cash it needs to stay afloat (it can make the seller’s failures seem like a success). An acquihire can reinvigorate both companies by rapidly scaling up their potential.

This article first appeared in the Berkshire Eagle on November 12, 2022.