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Investing in Human Capital


It’s very easy to get swept up in the nitty gritty of due diligence when assessing a prospective acquisition target. The deeper you get into balance sheets and cash flow statements, the harder it becomes to see the forest for the trees. One of the most overlooked assets of a business that is difficult to quantify but critical to analyze, are its people. 

Middle Market Review recently sat down with Michael Lyons, President at Lincolnshire Management, to learn more about the integral role human capital assessment plays in the firm’s due diligence and post-acquisition planning. 

MMR: How do human capital considerations figure into your transaction considerations? 

ML: Human capital is one of the most important and sometimes overlooked elements in any deal, particularly for companies in the lower-middle and middle market. For companies of this size, beyond a strong CEO, there sometimes isn’t much bench strength. Or sometimes a founder is looking for support and additional resources, not just money, to scale a business. It is critical to properly assess the second layer of management. How capable are they? Are they committed? Do they have growth potential? Is the team too thin and do you need to hire additional people? Do you need to upgrade certain positions? Are people properly aligned and properly incentivized?

For the workforce as a whole, it is important to assess, among other things: availability, morale, engagement, compensation and benefits, skill levels, training, worker safety, longevity, turnover, etc.

The right people will help move the business in the right direction.

MMR: How should private equity acquirers of middle market businesses think about workforce issues? Has the industry changed its approach to talent recruitment and development since the early days of private equity?

ML: It is safe to assume all buyers will claim they spend time assessing workforce issues and take them seriously, but approaches vary widely. At Lincolnshire, we have always believed in multiple meaningful one-on-one interactions with the members of a target or newly acquired company. Because many of our deal professionals have strong operating backgrounds in the types of companies we target, we are well positioned to assess the workforce — from management on down.

Today, some firms are using personality assessment tests, typically based on psychological attributes that they then use to determine differing strengths and types of personalities in a workplace. Another trend is productivity tracking, which has advanced significantly in recent years.

MMR: What role will COVID-19 play in determining the valuation of a business?

ML: Post-COVID, the cost of PPE will clearly be factored into the cash flows of the business. Most any business operating today has already implemented safety measures and are incurring the cost of these necessary safety supplies and other materials. For those businesses not operating at full strength, a buyer will need to extrapolate the additional costs of these new measures as the company returns to full capacity. Gauging the impact on productivity, if any, due to social distancing on the factory floor or office spacing will need to be assessed but should be fairly easy to estimate.

MMR: Do human capital issues differ between private equity firms and strategic acquirers?

ML: A private equity firm is more likely to draw on operating partners and consultants to strengthen the team in the short term as it recruits new talent with the experience required to bring the company to the next level. There is an advantage for private equity owners in that they are not locked into an existing structure and can have more freedom to bring in people with the right skill set. For example, taking a company from $1 million to $100 million requires very different skills than taking a $100 million company to $500 million.

MMR: Is workforce rationalization discussed at the outset of an acquisition with a target company’s senior leadership team?

ML: Buyers look to improve profitability and cash flow, and payroll is obviously a part of that equation. All situations are case specific, but a target company’s senior leadership team and buyer all agree that a well-run company eliminates unnecessary cost. If rationalizing the workforce is required, most management teams are motivated to lead the way. The preferred route, of course, is always to grow a business. More often than not, adding people to drive growth is more productive for ultimately delivering value.

Some workforces need to upgrade talent, but that doesn’t necessarily result in fewer workers, and successful, growing companies create more satisfied jobs and employees.

About Michael Lyons

Mike Lyons is the President of Lincolnshire Management with 35 years of experience in operations, finance and senior management. Mike is a member of the Investment Committee and has been involved in the successful acquisition and realization of over 40 companies during the past 20 years at Lincolnshire.

About Lincolnshire Management, Inc.

Lincolnshire Management Inc., founded in 1986, is a private equity firm focused on investing in and acquiring growing middle market companies across an array of industries. Headquartered in New York, Lincolnshire Management invests in acquisitions of private companies, recapitalizations, corporate divestitures, management buyouts and growth equity for public and private companies. Lincolnshire Management manages over $1.7 billion of private equity capital. For more information, visit

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