Very few mergers or acquisitions fail because they were poorly conceived; they fail because they were poorly executed.
One of the trickiest aspects to executing a successful merger or acquisition is what happens after the transaction closes. There are many systems to be merged: information technology, human resources, vendor management, leadership structure, culture, sales strategies, and branding, just to name a few. Of all of these, however, one of the most critical is ensuring a cultural fit and establishing aligned post-closing interests among the parties. This is ALWAYS critical―but especially so if the transaction contains any form of earn-out or post-closing contingent payment.
By taking a proactive approach to assess cultural fit during the due diligence process, businesses can mitigate risk and set themselves up for success months before signing on the dotted line. In fact, we recommend conducting much of the due diligence process under the guise of transition planning anyway (as that context often causes people to be more candid and transparent about potential hindrances or issues).
Below are some thoughts to guide your pre-closing acquisition strategy:
1.) Consider cultural fit from the first meeting. When reviewing targets, ask about (and observe) communication, camaraderie, organizational structure, and above all, shared values. A business that is collaborative and entrepreneurial is unlikely to synergize with a team coming from a culture that is rigid and self-serving. Review employee turnover rates, exit interviews, engagement surveys, and social media sites like GlassDoor. Also, just pay attention to the “feel” of the organization when walking around or observing how people interact in meetings. Are they empowered or controlled? Does it feel similar to your company―or is it noticeably different?
Validate what management says drives the company by talking with the employees. If an owner says their company is entrepreneurial, ask the employees if they are able to operate autonomously and how often corporate gets involved. In a perfect situation, management and employees will echo the same sentiments.
2.) To grasp a company’s comfort level with risk, ask the owners what opportunities they have explored and which of those they decided to tap into. Owners that are risk averse are usually less willing to make major changes because they are focused on the near-term top-line; for example, they would rather make a sure $5 million next year than potentially double that in 2-3 years. Companies that are focused on the long-term or bottom-line are more comfortable investing in something that won’t pay off right away. It helps to ask the employees what opportunities they see for the company and what their feelings are about them.
Incentive compensation is another indicator, as incentivizing salespeople to produce growth encourages risk taking. Some salespeople are paid for retaining customers, some to acquire new customers, and others based on gross profit. Whichever it is, the compensation structure should be aligned with overall company goals.
3.) A company that is results-oriented, as opposed to task-oriented, will use clearly identified metrics to measure success and trigger accountability. A buyer can get a sense for this by asking to see internal reports. Whatever the company provides to its management team will give a good sense for what it is they really focus on. Do they spend the most attention on KPIs or high-level strategic initiatives? Do they measure by cash flows, projections, or budget line items? Hopefully the company you’re acquiring is keenly focused on bottom-line profitability. Companies often make the mistake of focusing on revenue growth, but at the end of the day, if it doesn’t fall to the bottom line in profitability, that revenue growth is meaningless.
4.) Identify key employees and present them with post-close employment contracts. This will also give you an opportunity to determine what is important to them, how they are motivated, what concerns they have, and their overall view of the company and its prospects (as well as their individual role and potential impediments to their future success).
5.) Bring the management teams together to brainstorm what the ideal future-state, post-transaction company should look like. How aligned are key players? Are power struggles beginning to surface? Do people interact in a respectful and constructive manner? What are the roles and responsibilities of the management teams going forward? Regardless of whether the transaction is touted as a “merger of equals”, that is never the case. If you are the acquirer, you are in control and it’s best that all parties acknowledge that fact at the outset.
6.) Identify and negotiate key contracts for post-close periods. Is the company customer and service focused? To retain the value of the newly acquired business, buyers need to understand mutual expectations for vendors, suppliers, and customers and build strong customer relationships and rapport.
When an issue does surface during the diligence process, often the wisest move will be to bring an advisor to the table. You will have to live with the other management team post-transaction and you can use the advisor as a buffer. The advisor will structure the transaction and acquisition agreement in a manner that puts the business on the path to success and facilitate a process that allows you to gain clarity and confidence in the cultural fit between the two organizations. The M&A advisor will also help to structure the transaction to align interests to ensure that all parties are rowing in the same direction post-closing, with a shared goal of maximizing the long-term success of the Company.
In acquisitions, as in most of business, the old adage that “culture eats strategy for lunch” certainly applies.