Considerations When Selling to a Financial Buyer

Epoch insights for your business

The Importance of Culture When Selling a Business

Research has shown that as many as 70-80 percent of all mergers fail to meet their original business and financial goals. As a result, brand value, goodwill, and culture often suffer along with business value, reducing or eliminating the appeal that inspired the transaction in the first place. When asked why, the majority of leaders cite a misalignment between the two organizations’ cultures and integration challenges (often a result of the differing cultures). Culture, values, and organizational purpose is typically ignored during the sale process in favor of drilling down on the numbers – revenue enhancement, cost synergies and/or margin expansion.

The path to the long-term, sustainable success of a sale transaction – for a business, its employees, and its unique culture - includes the seller assessing a buyer’s values and culture throughout the entirety of the sale process, before a transaction closes.  Understanding culture and leadership between organizations during the sale process is where stakeholder-value is created or destroyed.  Culture is very powerful, and cultural differences between two organizations should be taken into account and should include assessing core values, organizational purpose, leadership style and people philosophy, decision making and measurement, communication, and conflict and collaboration style. 

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What is culture and why does it have such a determining effect on M&A outcomes? Culture is “how things get done around here” and is essentially a set of underlying beliefs and assumptions…about the organization and its people, leaders, customers, competitors, industry, etc.  They are not always visible, and are often held subconsciously.  It’s the areas of unspoken agreement that establish a company’s identity, values, and sense of purpose. Understanding organizational culture is critical to merger and acquisition success because it’s culture that drives what is unique and valuable in all companies, but especially in values-led and purpose-driven organizations. It’s inseparable. Yet culture is hard to define, let alone analyze. As a result, most sellers (and buyers) don’t assess culture as seriously as they review the financials and tangible assets during due diligence.  This oversight often results in misalignment that is only exposed after the deal has closed. At EPOCH Pi we believe all sellers should perform a “culture beliefs assessment” of the potential buyers, from the beginning of the sale process through to the end.  This allows a seller to uncover and safeguard common values and behaviors, informs how the transaction should be structured in order to protect them, and stays ahead of possible cultural conflicts that will not only hurt financial performance, but threaten the seller’s mission, values and/or purpose beyond profit. Or it may identify a transaction the seller should walk away from.

Given the persistent lack of cultural due diligence today, business owners and leaders who take steps towards assessing values-alignment and managing culture risk before a deal is finalized (and utilize that information to help guide transaction structure) will improve the odds of the longer-term success of the company’s purpose AND profit.  

By definition, a sale, merger or acquisition is about bringing two previously separate organizations together. These organizations are composed of people. In forming any partnership between people—not unlike a marriage—while ignoring the intangible but very real points of conflict doesn’t make the differences disappear; people know they exist even if they remain unspoken.  An assessment of a buyer’s values and culture, and the fit with those of the seller, facilitates honest conversations and surfaces existing beliefs and assumptions.  That insight could lead to thoughtful actions, transaction structures, and integration plans that don’t compromise the long-term goals, stakeholder value, and uniqueness of the selling organizations culture and values.  As a result, either the combined organization will be stronger, more resilient, with capabilities, culture, and a competitive advantage that competitors will find hard to duplicate or the insights will identify a transaction from which the seller should walk away.  Either way, we’d define that as success if it ensures that values-led, purpose-driven companies continue to influence, inspire, and exemplify how business can have a positive impact.

EPOCH Pi