The Importance of Cultural Fit in Tech M&A
Company culture ‒ the shared values, beliefs, attitudes, and practices that characterize an organization ‒ is very important in influencing how employees interact and work together. And it's just as important for tech company sellers to find the right buyer or partner in M&A. Having a good cultural fit between the seller’s and buyer’s companies is a key factor in achieving success in an M&A transaction.
Why cultural fit is important
For tech company sellers, successful not only means an optimal, well-structured payout. It also means the longer-term success of the deal after the acquisition or merger. Cultural fit determines how well the two entities in M&A can integrate and collaborate in the post-merger or post-acquisition environment. A good cultural fit leads to high employee retention, smooth operations, and strong synergy between the two entities. Conversely, a poor cultural fit can lead to employee dissatisfaction, decreased productivity, and ultimately the failure of the acquisition or merger.
How to determine cultural fit
Good cultural fit is not something that a seller can simply hope for. It's something a seller needs to focus on throughout the M&A process. And that focus should begin as soon as possible and continue until (and even after) closing. In the early stages of getting acquainted with the buyer, it's important to ask what their basic values are, their communication style, and how they approach work. For instance, how do they prioritize the workload of their employees? What are their KPIs? What are their short term and longer-term goals? In addition, understanding the buying company's policies, practices, and customs, as well as what their employees do during the day and outside of work helps to paint a picture of the overall culture of the company. What’s important is to continue asking questions about the buyer’s culture as part of your due diligence. Be curious, and focus on what and how the buyer answers those questions.
Assess whether those insights about the buyer’s culture align with your values and approaches, and if not, determine whether you and the buyer have the flexibility to find good solutions to those differences. It helps for both parties to be open-minded regarding these differences because it can lead to solutions that set the foundation for a successful outcome.
Understand your own culture
One thing that should be evident to you as a tech seller is the need to understand your own company culture. If you don’t adequately understand that culture, it makes it makes it difficult to understand, assess, and manage what could be important cultural differences between your company and the buyer’s company. Knowing your company culture is fundamental. It allows you to identify strengths, weaknesses, and areas where your culture and the buyer’s culture align or differ, ultimately making for a smoother and more successful integration.
Additionally, it’s important to be able to communicate your company’s culture to the prospective buyer. To do that, be transparent and honest about your company's values, your employees' expectations, and your overall workplace environment. Be authentic. Doing that allows for you and the buyer to establish a basis of trust such that if there are any potential cultural clashes, both parties can develop effective integration strategies.
Be clear about what changes you will or won't accept
Some changes are inevitable after a merger or acquisition. Some changes are things that as a seller you are willing to accept. Others you might not. Ask the buyer what changes he or she is planning to implement. You can also get a sense of what changes the buyer might make by asking if they have made any previous acquisitions and what changes were made as part of the subsequent integration. In response, make clear whether those changes are acceptable to you or not. It's also important to document what you will and will not accept. For instance, you can specify your expectations in the letter of intent (LOI) and the purchase agreement. Conversely, once you and the buyer agree on what is acceptable and what is not, do not make unilateral changes to those agreed-upon terms. Maintaining transparency and open communication between you and the buyer are important in any M&A deal.
Maintaining cultural fit after the merger or acquisition
A good way to help ensure cultural fit after a merger or acquisition is to put together an integration plan beforehand, one that stresses the importance of good communication and collaboration between the leadership and operational teams of your company and those of the buyer. The plan should also identify initiatives that foster a sense of belonging and engagement among employees of both companies. Having clear communication channels is very important post-merger or acquisition. So the integration plan should address communication channels too.
In addition, it's good practice for the seller and buyer to establish an integration team comprised of representatives from both companies to closely monitor cultural integration and address any related problems or concerns.
By proactively addressing cultural fit during the M&A process, through questioning, listening, and planning, a tech company seller can significantly improve the likelihood of a successful cultural integration following a merger or acquisition.