Acquiring Companies with “Illegal” Workers

There are people advocating for undocumented immigrants, people opposing illegal immigrants, and a vast desert of common ground exists between the two.  This blog post is not intended to take a position on the subject, instead focusing on the implications for companies and managers that acquire firms where illegal/undocumented immigrants work.

Estimates of illegal/undocumented immigrants in the United States hover around 11 million, and it is no secret that a reasonable percentage of them (probably a percentage in the same range as the general population) are employed somewhere.

The question is, where?

It’s mostly smaller employers

Popular media has illegal/undocumented workers taking jobs across the spectrum of American employment.  In this view, we would find such workers occupying the unskilled and lower paying jobs in large corporations, chain restaurants, small employers of all types, and as casual labor.

Where I’ve come across illegal/undocumented workers has pretty much uniformly been in smaller employers, ones where the owners are likely to fly under the radar of governmental and media scrutiny.

Having primarily worked for large corporations, I can state without reservation that (with few possible exceptions) they do not hire illegal/undocumented workers.  There is far too much for the company to lose through an ICE raid and the subsequent media circus than could ever be gained by utilizing such people.  E-verify makes checking a person’s legal status simple.  Large employers use the tools to protect themselves from this kind of risk.

Smaller employers often have a different view of risks and rewards.

It’s a willful act, not an accident

Any employer that is hiring someone with questionable legal status is doing so willfully, whether in support of their political beliefs, a result of personal compassion, or simply to fill jobs they can’t get otherwise seem to fill.

I have come across numerous illegal/undocumented workers in smaller manufacturing companies – ones where the firm is generally subject to limited governmental and media oversight.

When you’re involved in the acquisition of such a company, you need to protect yourself.  In some cases, doing so means the target company simply becomes “unacquirable.”

An acquisition disaster

While working for one of my more acquisitive employers, the company purchased a small manufacturing company in one of the mountain states of the western U.S.  At the time of acquisition (which was before I had responsibility for this particular business unit), the company discovered during due diligence that many of the employees of the acquisition target were illegal/undocumented.

The situation should have thrown up all kinds of red flags, but apparently it didn’t.  The strategy for dealing with this situation, as stated by my predecessor, was to keep the former owner of the company in place as an employee and saddle him with the responsibility of replacing all those employees we couldn’t keep.

This didn’t work.  At all.

The former owner only stuck around for a year.  During that time, he repeatedly delayed doing anything about the undocumented/illegal workers, stating that they had been loyal, hard-working people and he owed them “a chance” to “straighten out” their documents.

As you can probably guess, there was more going on here than just the opportunistic employment of “cheap” labor (which wasn’t any cheaper than typical wages in the local market, by the way).  This former owner believed the laws of the U.S. were simply wrong-minded, and he was doing his part to try to protect people that had been loyally committed to him when he needed them.

Eventually, we forced him to terminate the problematic workers.  Then the business fell apart.

Not only did we have to eliminate ninety percent of the workforce, the supervisors went as well.  Along with much of the manufacturing know-how.  The workers that were hired to replace those that departed were mostly of a very poor quality – attendance problems, disciplinary problems, substance abuse, and vastly less capable and hard-working than those they replaced.

The business slipped from modestly profitable to a painful money loser.

While all of the problems weren’t caused by the workforce replacement, it was the major contributor to the problem.

Headed for trouble

The prior example, as well as other experiences – both mine and others I observed – have convinced me that the presence of illegal/undocumented workers in an acquisition target is a prescription for trouble.

Generally, you should walk the other way if find a significant portion of the workforce in your target company is undocumented/illegal.

The challenge – how do you discover the truth?

Most sellers will not allow you to check employment files (which you should do) until after a deal is struck and you are in due diligence.  At that point, it is tempting to develop a coping strategy (like the one described above – make the former owner deal with it as an employee) – one that is often unworkable – and rationalize going forward with the deal rather than pulling the plug.

This is almost always a mistake.

I recommend assessing this risk as you tour the facilities.  If there are a significantly higher percentage of Hispanic workers than are present in the local labor pool, chances are some are illegal/undocumented.

Once you suspect there is a significant risk, I suggest dealing with this during negotiations.  Rather than asking the seller if any of the employees are illegal/undocumented, I would insert language into the contract that pushes financial consequences back onto the sellers if a significant proportion of the workforce must be terminated due to documentation concerns.  For instance, a significant holdback of purchase price that will be forfeited if more than 20% of the workforce must be replaced.

The truth will then come out.

A year delay

I employed this strategy on an acquisition I worked on in Texas.  While the sellers never admitted they were employing a significant number of undocumented/illegal workers, the pace of the deal slowed considerably as the company began solving the problem themselves one step at a time.

A year later, they managed to get the workforce composition to an acceptable level.  The deal could have then proceeded, except in the intervening time several other issues had come to light.

As I’ve opined in the past, time kills deals and this one was no exception.

Conclusion

When contemplating the acquisition of a small company in the United States, particularly one that has a significant proportion of its employees in low wage/skill jobs, there is always the risk of exposing yourself to a big problem with illegal/undocumented workers.

To manage this risk, you should evaluate the potential for problems during your personal tour of the facilities, protect yourself financially in the contract, and be prepared to walk away from the deal if due diligence uncovers any major problems.  30.1

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