"Cultural Due Diligence" in the Sale of a Business


	Lynn Westergard

December 2010

“Cultural Due Diligence” in the Sale of a Business

Keeping the key employee group intact is often critical to the success of a business acquisition

As they struggled to endure America’s prolonged economic slump, many business owners have learned that slashing expenses and shedding operations, while painful, hold certain benefits going forward. Some enterprises, now leaner, stronger and more efficient, have accumulated significant amounts of cash. Because that money is not generating returns in more conventional ways (i.e., product development, market expansion, etc.), in many cases it is being used to acquire other businesses, resulting in a relatively active global M&A industry.

Strategic View. Many companies are taking a prudent stand and focusing on strategic deals that support their core direction and produce measurable returns. They are not purchasing simply for the sake of growth; instead, they are searching for products and services related to their core businesses.

Strategic focus is something businesses may want to emphasize if they are planning mergers or acquisitions, or if they are in industries where they may become takeover targets. In an M&A environment highlighted by strategic purchases, it is critical to emphasize risk management and ensure that due diligence is well directed.

Cultural Due Diligence. In many cases, it’s not the deal that goes wrong; it’s the implementation. Many failures occur in transactions that make perfect business sense. The difficulty is that due diligence often concentrates only on the financial and legal implications of a proposed transaction. Less time and effort go toward critical “people” issues, such as corporate cultures, compatible customer bases, values, work habits, and attitudes that may have been developed over many years.

Failing to deal with these issues effectively and early on can result in the departure of crucial employees and a decline in productivity.

A cultural evaluation may be a high priority when a merger or acquisition is on the agenda. Among other qualitative factors, these evaluations help reveal each company’s values, management style, work environment, and founding philosophies; strategic visions to determine areas of compatibility and synergy; and assessments of employees, customers, and other stakeholders, as well as evaluation of areas of common ground and avenues of potential conflict.

There was a time when the predominant focus of a pre-merger or acquisition evaluation was the quantitative side of the equation. But companies have learned the importance of focusing on the whole picture, with the goal of ending up with an integrated plan in which all of the divergent puzzle pieces eventually fit together.

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.