Mergers & Acquisitions: The Importance of Cultural Due Diligence

Merger & Acquisition on the Rise

Merger & acquisition has certainly been on the rise as baby boomer business owners seek to cash out their interests in closely held businesses. Yet, even under guidance of experienced M&A attorneys, business combinations continue to fail at an alarming rate. Often, this can be attributed to a poor fit between the two organizations’ cultures, values and philosophies.

A Classic Tale

Traditional due diligence often fails to take into consideration the very real impact of organizational behavior and development issues. And that can spell trouble.

Consider the tale of two automotive suppliers, Muscle Motors and Classic Car Industries. Seeking exponential growth opportunities, the principles of the two organizations embarked on a merger. Of course, their attorneys and accountants provided the traditional legal and financial due diligence services, and the merger was finalized.

Unfortunately, the new entity never reached its true potential. Two years later, the new company is failing to meet its strategic, financial and operational objectives.

merger puzzleOn paper, it appeared to be a match made in heaven, with strong potential for market synergy. Muscle Motors, however, was as conservative as its buttoned-down founder, who continued to operate out of the same grimy industrial park. Instead of spending on swanky facilities, Muscle Motors opted to share the wealth with its long-term employees, many of whom were empowered to make critical business decisions.

On the other end of the spectrum, Classic Car Industries operated out of prime real estate on a high-exposure stretch of interstate. It was managed as a tightly controlled operation that believed that only the principles should share the wealth and decision-making.

An Expanded Role for CPAs

Traditionally, CPAs have limited their role to financial and tax advisory services. However, accounting professionals can add value to the M&A process by performing “cultural due diligence” to help ensure that the two parties also have compatible organizational traits.

Such a holistic approach can help identify critical organizational issues between clients contemplating a merger or acquisition. Tasks the CPA consultant can perform in developing a cultural due diligence include:

1. Evaluate the culture. In the hands of a competent accounting professional, cultural due diligence can address key questions such as:

  • Why the merger?
  • Who benefits?
  • How will it impact people, performance and responsibilities?
  • Which entity will emerge as the dominant force?

2. Identify stakeholders and issues. Identify the stakeholders to determine their issues and concerns regarding the merger. Employees, for example, will want to know the impact on their positions, while customers may want to know its impact on their service.

3. Develop a communications plan. Once the stakeholders are identified, a comprehensive plan can be devised to inform them about the nature of the merger and its benefits to them.

4. Draft a mission and vision statement. The CPA can facilitate the development of a mission and vision statement – which clearly communicates the direction, goals and objectives of the new organization – and then communicate it effectively throughout the entire organization.

5. Develop a strategic plan. The goal of the strategic plan is to provide a map for the client to fulfill its mission and vision. The CPA can facilitate implementation and help monitor completion of key milestones.

6. Address operational and management issues. The CPA can also be key in identifying the new entity’s organizational strengths and weaknesses. For example, the new organization may not be staffed sufficiently to properly manage sales and production challenges of a larger entity. Likewise, the human resources function may be strained by a flood of new employees.

7. Provide end-to-end solutions. Finally, the CPA may have an opportunity to provide business and administrative solutions for the new entity. This could include bookkeeping and payroll processing, as well as monthly performance evaluations of the new entity.

 In the end, cultural due diligence can help increase the chances of a successful M&A, or avoid an M&A that was not meant to be.

A skilled accounting partner can bring value to the M&A process. Contact the office of Saville, Dodgen & Company to learn more.

, , ,

No comments yet.

Leave a Reply