How Company Culture Plays a Big Role in M&A

Cristian Anastasiu

It’s commonly accepted knowledge in the industry that company culture plays a key role in mergers and acquisitions. Whether you’re acquiring a company, or your company is being acquired, understanding how company culture will impact both the integration of an acquired business and the valuation of a business that is on the market is crucial to a successful transaction.

For many businesses, human capital is an important, sometimes the most important, asset of the business. As a result, if the cultures of the purchaser and the acquired company don’t fit, an acquirer may end up paying more for a company than it’s ultimately worth. Similarly, if you’re selling a business and your company culture appears to be difficult to integrate, it can negatively impact the amount an acquirer will pay for your company. Additionally, if your payout is based on the performance of your company after it is purchased, such as an earnout, a difficult integration process can decrease the amount you ultimately receive for the business.

Here are three key areas we’ll explore — factors to measure company culture; analyzing company cultures; and making a merger work for you.

Factors to Measure Company Culture

While a lot can be said for gut feel when evaluating a company’s culture, there are other, less subjective, factors that can be used for measurement purposes. These include quantitative metrics such as:

• Sales commission plan — Is it focused on aggressively winning new customers vs. maintaining and growing the existing customer base? Is it top line or profitability focused? Flexible / individualized or rigid / structured? Does the commission plan encourage teamwork or personal performance?
• Employee benefits — When a company offers extensive employee benefits to its employees it can indicate an employee-centered culture, often found in companies where employee morale and loyalty is crucial to the performance of the business.
• Hiring / termination practices — Are multiple interviews with a large group of employees required before making a hiring decision? Is it a group or an individual decision-making process?
• Employee tenure — A short tenure can be an indicator of a transactional, hire-and-fire culture, or at the other extreme, a long tenure can indicate a culture where longevity with the company and loyalty are more important than recent performance.
• Customer size — Does the customer base consist mainly of global enterprises, or rather medium or small businesses? Any specific vertical industry focus? Companies tend to develop their processes — and as a result their culture — based on the type of customers they serve.
• Customer churn — Is it easier for the company to win new customers rather than retain old ones? This could be a sign of a transactional rather than relationship-based culture.
• Are the company’s results and specifically the financial statements like the P&L shared internally with the management or maybe with all employees? How often? How much?
• Founders background — The founders’ professional background (technical/ sales/ operations/ financial) and their personality and values impact the company culture.
• Does the company have one or more shareholders? Does that aspect foster a more open, team-based culture and how does the personality of each owner, if there are several shareholders, impact the culture overall?
• Location – (East Coast/ Midwest/ West Coast, cross border, etc.).
• Have either the buyer or seller done acquisitions in the past and what were the lessons learned?

Many buyers believe, when assessing the culture of a potential acquisition, that if there is good chemistry with the owner of a small company (less than 50 employees), that will translate to …