The labor challenges companies and portfolio managers are facing in the market are affecting how they look at deals. Mission Veterinary Partners CFO Matthew Davis says his organization has been taking an even finer approach to dealmaking, looking not just at the executive team but at all levels of talent during diligence.

"Typically, when we'd acquire a practice, we would just look at doctor comp," Davis says.
"An owner practice with a couple of associates, there's typically an adjustment in their wages with our comp model. But now we're extending that down and looking at all levels and doing comparative analysis across what we're seeing at the target is compared to what we have in our portfolio and that does drive some adjustments in how we look at those deals."

Industrial Opportunity Partners Operating Principal - Chairman Philip Fioravante says he's seeing labor challenges both at the rate-based level and increasingly on the salary level. That's led to changes in the way they value targets.

"So, one of the things that we've done in terms of valuations of businesses, we've really stepped up the need to have larger capital expenditure requirements for our businesses," he says. "We really need to find a better balance of automation with the employees and we're taking a real hard look during diligence in terms of where can we deploy and employ automation to actually augment the need to have workers."

Aquila Equity Partners Founder & Managing Partner Gary Lewis says in the broader contractor space, he's looking at what used to be a certain acquisition they wanted for geographic exposure or service mix or that allows them to better serve customers from a location, they're now looking at M&A as an addition to the tool kit from a labor recruitment standpoint.

"We're looking at M&A as a permanent core tool in that process," Lewis says. "Where it may have been ad hoc, inadvertent or maybe an afterthought previously, it is an active part of our conversations that we're having every day and it's really pushed the conversation to the forefront."

In those conversations, he says they're trying to better understand whether the target's culture fits with them and how that transition will happen.

"We're really big believers in being team-oriented and aligned," he says. "And is (the target company) a me-first, dictatorial culture that we're potentially stepping into versus more of a team-oriented, family environment? Those can have implications or ramifications, even if the broader business is an ideal fit."

Davis, Fioravante and Lewis, along with Purple Squirrel Advisors' Carrie Schochet and Lockton Companies' Quinn Damon, spoke at last year's Detroit Smart Business Dealmakers Conference about lessons learned and best practices from growing portfolio companies in a labor-challenged environment.