When you are planning to merge two companies or acquire another organization, the quality of your due diligence will largely impact the effectiveness of joining the two entities. Due diligence can include many factors such as financial documents, intellectual property, corporate records, market position, liabilities, and sales. These factors generally fall in one of three categories: commercial, legal, or financial. However, there is one key due diligence factor that is often overlooked or only evaluated at a very top level: people and culture.
Over the course of the past three years, through a pandemic, rising inflation, and the Great Resignation, one thing has crystalized: people are at the core of your business. This is no different in an M&A situation, unless you are buying a company strictly for its market position or customers and have no intention of retaining its talent.
Here are six factors you should consider when conducting people and culture due diligence in the leadup to an M&A transaction:
1. What are the company’s core values? This can be ascertained by conversations and interviews with leadership, but it also should be confirmed with high performing team members. Take special note if the answers you receive from leadership do not align with the answers you receive from top performers.
2. What is their formal mission? Most companies have defined, written mission statements. If they do not have a documented mission, it is important to ask probing questions to find out why they do not.
3. What are their informal norms? A written mission statement is important but the team’s day-to-day reality is what will either make or break a culture. Interviews with key players and top performers will help give insight into the day-to-day norms you are about to inherit.
4. What promises have been made? If you intend to retain much of the team you are acquiring it is important to know their expectations. This pertains to the merger, of course, but going as far back as promises made in the hiring process can be just as critical. That said, just because promises were made in the past does not mean that you have to keep them.
It is crucial that you are in the position of knowing, not guessing. If you don’t know what promises exist, you won’t be able to explain why certain decisions may change the promises made by previous leadership. Areas you’ll particularly want to explore include compensation, promotions, and benefits.
5. Who is on the team? This is typically where the rubber meets the road. As shown in the diagram below, we often evaluate talent through an individual’s “briefcase.” This helps us answer questions such as: What do they know? Where did they go to school? How many years of experience do they have? Sometimes we also evaluate their values and interest (the “heart” in the diagram). But we often skip how they are hard wired (the “head”).
It is important to understand what drives the individuals both in the acquiring organization and the acquired. An acquisition is a big change for all parties involved and represents a unique opportunity for leadership to ensure that they have the right people in the right seats to maximize their investment.
6. What are the team dynamics? As previously mentioned, a merger or acquisition is an opportunity to step back and evaluate what is working and what isn’t. As you join these two organizations together, it is important to understand the dynamics between individuals. Every time someone enters or exits a team, the dynamic shifts. Knowing the players, how they interact, and the balance of talent among them will help you improve low performing teams and not accidentally disrupt well performing ones.
Giving thoughtful consideration to these six factors in your due diligence phase will help you make a smart investment decision, efficiently meld the two organizations together, and avoid costly people issues. It’s important to note that turnover can cost your company up to 250 percent of an individual’s salary. Ensuring that you are just as thoughtful about your due diligence around people and culture as you are around finance and risk will be key to your successful transaction.
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