M&A Culture Due Diligence
By Ian Richardson, Principal Consultant, Fox & Crow Group
Inspired by Thursday Process with guest Mark Shaw, CEO of Stored Tech
M&A Due Diligence
“This is awesome. This will be amazing. I love this person/company, they love me. Let’s do this!”
Mark Shaw, CEO of Stored Technologies, sums up the “rose-colored glasses” donned during M&A.
This “relational honeymoon” period will end and reality will settle in.
Mark and I sat down to talk about company culture and managing it through the M&A experience. Our conversation was around the importance of M&A due diligence. During our chat, company culture came up over and again. Mark shared the importance around post-acquisition fit. Answering the question “Is this going to work moving forward?”
The necessity of due diligence in mergers and acquisitions
Due Diligence and M&A go hand in hand. You can’t do one without the other. I’d challenge you to find someone in the field who would disagree. At its crux – due diligence exists on both ends of the equation.
Sellers want to know if the buyer can deliver equal or better results post-sale. They want to know if their customers will be well cared for. They want to ensure their team have a safe place to land post-sale. They also want to know they’re going to get the rewards for their hard work to date. No one wants a company they sacrificed for to “fail” post-acquisition.
Buyers concern themselves with “post-acquisition performance.” Will the company proceed as it had in the past without the entrepreneur(s) at the helm? Will the new team mesh with our existing team? Will the customers stay with us? What did we miss in our conversations?
Due Diligence Overview
Due Diligence is a legal and financial focused exercise. HR and client considerations are also large areas of focus. Common topics include:
Human Capital:
- Benefits and Pay scale alignment
- Differences in HR strategy or practices
- Retention of teams / talent
- Mitigation of single points of reliance
- Legal / compliance requirements (especially around new geographies)
Clients:
- Client base
- Client makeup
- Billing structure
- Rates charged
- Geographic range
- Ability to grow the base with new offerings
- Contract status
- Goodwill
Product and Service alignment
Finances:
- Performance of the organization
- P&L and Balance Sheet Health
- Accounting Practices – including both good and bad
- Cashflow
- Key metrics
Legal:
- Contracts and terms
- Alignment between the organizations in practices
- Outstanding legal risks or lawsuits
- Historical actions when “things go bad”
One item that gets missed is “company culture.” Too often, this key area gets overlooked when a company shows high financial returns. Culture can eat a company’s returns for a snack after it eats strategy for breakfast.
Due Diligence for Company Culture
Company culture is the critical component of an organization. An organization’s processes, habits, and practices can make or break an acquisition.
How does the company speak to its team, clients, prospects, and community?
How does the team communicate and work together?
What behaviors get rewarded, and what get frowned upon?
What are the core values of the company, and are they operationalized, or “lip service” only?
To quote Peter Drucker – “Culture eats strategy for breakfast.”
The best strategy for an acquisition or merger gets destroyed by a culture mismatch.
If you’re thinking M&A is a strategy for your organization – that’s why Fox & Crow exists.
My calendar is available here – Grab 30 minutes and let’s chat.
If you’re not ready to start the conversation, but want to keep in touch – our newsletter talks M&A, Strategy, and Culture on the regular. Sign up here.
