The Importance of M&A Culture Due Diligence

Woman and man shaking hands in office conference roomA 6-point blueprint.

By Domenick J. Esposito

Over the last several years, there have been over 200 merger, acquisition, alliance and joint venture announcements by the Top 100 and other fast-growing CPA firms. Every indication is that these combinations will continue at a very rapid rate as CPA firms are:

  • Facing an aging partner group that usually includes the most effective relationship and business development partners. Baby boomers have been a home run for CPA firms.
  • Finding organic growth very difficult to attain with little prospect that business is going to dramatically improve in the foreseeable future.
  • Realizing an inability to attract an adequate supply of high-quality talent to help perpetuate the firm.

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CPA firm CEOs and other senior management are very effective at financial and operational due diligence, tracking results and holding partners accountable for hitting timely targets. On its face, an observer would tend to conclude that these 200+ combinations are very accretive to partner profitability after an integration period of 18 to 24 months.

Unfortunately, with many combinations, this is not often the case.

When we speak to CEOs and other senior management at the Top 100 and other fast-growing firms, it’s apparent that many, if not most, of these combinations fall significantly short of growth and profit expectations. Some even wind up in divorce with costly breakup costs.

So, why is that?

Well, all too often, it comes down to culture incompatibilities between the acquirer and the acquiree that reduce the probability of a successful combination. Yes, when all is said and done, irreconcilable culture clash is often cited as the #1 reason why combinations fall short and fail to deliver the anticipated benefits. And when a combination starts to “leak oil,” the costs are painfully apparent as morale drops, new business originations aren’t very impressive, client billings soften, synergies fail to materialize and key partners and potential partners leave for other opportunities.

“Culture isn’t just one aspect of the game. It is the game.” – Lou Gerstner, former IBM chairman and CEO

We have found that when it comes to determining culture compatibilities, many firms talk a good game by citing a number of similarities as proof of compatibility. Cheap culture talk, however, masks potential red flags and fails to help firms navigate through thorny culture issues.

Before we take a deep dive into culture compatibilities between an acquirer and an acquiree and what can be done to deal with potential clashes, let’s define culture. To sum it up, each firm has a somewhat unique culture that essentially is the accumulation of shared values, beliefs and behaviors that determine how partners and staff carry out day-to-day tasks such as managing and governing the practice, serving clients and attracting and retaining talent.

We refer to a firm’s culture as its DNA – it is woven into a firm’s very existence. A firm’s culture has three key prongs:

  • The behaviors of the CEO, senior management and staff
  • The capabilities and decisions about where and how a firm should compete
  • A firm’s operating and governance models that are core to how it functions on a day-to-day basis

An assessment of culture compatibilities should not be a glossover or an afterthought when considering a possible combination. To minimize – or perhaps avoid – a shortfall in growth and profits, culture deserves a lot more upfront weight in the due diligence process. Firms should follow a cultural assessment blueprint similar to the one summarized below:

  • Give culture due diligence the same type of timely priority as financial, operational and legal due diligence. Avoid making cultural impact an afterthought that is ad hoc and superficial.
  • Have the firm’s CEO and other senior management drive culture due diligence and subsequent integration. It’s that important! Avoid delegating this thorny task to the human resources department or, worse yet, outsourcing it to an outside consulting firm. That’s a dead-on signal to your partners that culture compatibility is not high on your priority list and they will point to this if the deal starts missing desired targets. Instead, have senior leadership lead the charge of managing partner and staff expectations and anxieties and shape behaviors in the desired direction.
  • Use some simple tools to identify and diagnose the cultural differences that matter. Two tried and tested tools include:
    • Observe different ways of working, particularly when it comes to corporate governance, compensation models and quality control.
    • Hold key interviews and small partner group dinners to determine how the acquiree’s partners interact among themselves. Ask your partners if they would be proud to hold out the acquiree’s partners as your very own.
  • Determine the culture you want to see as a result of the combination. The acquirer usually has two choices here. The acquirer can assimilate the acquiree into its culture or it can create a blend of the acquirer’s and acquiree’s cultures. Depending on the facts, objectives and specific circumstances, either approach is viable.
  • Develop a culture change plan that addresses differences. Include orientation programs that can provide a sense if cultural blending is moving in the right direction.
  • Be forthcoming and astute with communications relating to cultural matters. Both the substance and timing of these messages are very important to the future success of the combination. Most important, make sure you walk the talk.

When you look in the mirror and are honest with yourself, how do you rate your firm’s effectiveness at addressing cultural issues when evaluating a possible combination? If your answer is that you haven’t given cultural compatibilities a serious evaluation up until now, you are probably leaving money on the table and might be even risking a nasty divorce.

If you want to improve outcomes and the probability that your next combination is a win-win for your partners, clients and staff, we encourage you to perform a cultural assessment right up front.

If you conclude that the acquirer and the acquiree have cultural differences, make an assessment whether things can be improved or not. If you conclude that there are irreconcilable cultural differences, we recommend that you cut off further conversations and negotiations. Better to call off the marriage than divorcing or worst yet, living together in disillusionment and frustration.

Buyer beware.

Why did John Dillinger rob banks? It was because that’s where the money is. Similarly, why should an acquirer make culture due diligence a priority when evaluating potential combinations? It’s because that’s where most deals fall apart and where the money is lost.

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