Leading The Deal With Culture

Many business owners work tirelessly to build their companies with some type of end goal in mind.  They build their business with several plausible endings.  They can build the business until:

• it’s not fun anymore or they’re gone- shut the doors
• they can leave a legacy – planned succession
• sell it to a similar bigger fish

• sell it to private equity investors to flip

It’s a choice. Some choices reflect personal beliefs, some are planned goals, and others are a result of forces beyond their control.  There has been a trend over the last two decades of business owners becoming increasingly attracted to the last option- selling to a private equity investor. From a human resources perspective, we have seen this option with the potential to be the most damaging.

In some of the worst cases, private equity investors are reported by former employees as bloodsuckers who feed off of the blood, sweat and tears of its people, culture and corporate values.  They are described as pirates that arrive, pillage and leave with only a small circle of executives enjoying immense wealth with little regard to the lives impacted by their greed.  Some tell stories of how certain private equity firms plunder every industry they touch.  These private equity firms don’t care about the long- term viability of the company. The people who receive the riches boast openly and they advocate how this is the way it should be done. Yet many experts report how private equity infusions have devastating effects and has widened the disparity between the haves and have-nots.

The first thing to go wrong is the destruction of a company’s trusted and beloved culture.  Culture can often be an afterthought for private equity deal-making, yet it can be the first thing that makes the deal unravel. A good example is Daimler Benz’s failed acquisition of Chrysler.  Everyone underestimated the cultural differences and no one knew how to overcome them.

Many times, there is no effort to focus on the people-side of the deal because it is an underdeveloped skill amongst the players. People and culture can be seen as overly complex and difficult to control.  Investors can read a balance sheet, calculate EBITA and project sales, but they find it too difficult to put a number on culture and they have little experience in how culture is influenced.

There tends to be no plans to integrate teams and the only focus on retention is limited to executives.  What is often missed is that the true value within the business lies with the people just below the top tier.  If they leave, revenues potentially leave with them.

In a survey performed by Price Waterhouse, it reported most companies would have included cultural aspects of the deal if they were to do it again.

• 57% said that cultural issues hampered deal value realization. The resulting loss of talent can quickly throw plans off course.

• 83% of the deals that lost significant value saw between 21-30% of key talent leave the business.
• A breakdown of morale in the business can also deter new talent from joining.

It’s clear that culture should be a key focus on the agenda, yet we find it very hard to convince a private equity firm to include this in due diligence.  As HR consultants who have been brought into merger and acquisition deals, there can be many preemptive, during and after steps that assist in cultural awareness and more positive outcomes.  HR consultants can:

• Analyze the workflows needed in the newly formed organization and identify team members with the knowledge, skills and abilities to accomplish new measures.

• Planted consultants in both companies to influence the companies’ people and culture towards the same initiatives.
• Identify the keepers and the reductions.
• Afterward, they can communicate the benefits and build support. They can develop a plan for change and implement steps to build a winning culture in the newly formed business.

It is a choice to cut and run or pay it forward.  If the goal is to build the future, leading with culture can avoid many mistakes.  Investors can turn culture from a missed factor to a driver of deal value. The deal can be an example of greed and destruction or it can be a story about how a great company took the next step to even more success.