Corporate culture is a financial value-add for succession planning

'Nearly two-thirds of acquired companies lose market share in the first quarter; by the third quarter, the figure is 90%, due to companies not conducting thorough human due diligence before acquiring or preparing for succession.

When businesses are preparing for a potential acquisition or to acquire a business, reviewing the tangibles (financials, taxes, profit) is essential but so, too, is reviewing the intangibles, that is, people, structures, systems and the culture,' says Craig McCallum, Head of Corporate Services and Marketing at Mettle Group, a corporate culture specialist consultancy firm.

Recent research shows that, three years following an acquisition, 45% of companies globally had a total shareholder return lower than that of their industry average. Similar findings have been reported by other studies, with barely half the respondents achieved their revenue goals following an acquisition (or merger). The reason for the relatively high failure rate of acquisitions suggests that the critical people issues were left too late in the review.

The success of most acquisitions hinges not on dollars but on people. A study of 207 companies over an 11 year period showed that companies who worked on changing their culture improved revenue by 516%, net income by 755% and stock prices by 827%. 'When non-financial factors are taken into account, earnings forecasts are more accurate, thus reducing risk to investors.'

Craig advises that a common factor Mettle comes across with clients who are undergoing or have been involved in an acquisition is that the valuation of human capital is being addressed too late in the transaction, or not at all. The result is financial and shareholder losses and a lot of extra work and complication for the new owners in addressing the internal issues that could have been assessed and planned for earlier in the acquisition due diligence process.

'Mettle’s culture diagnostic and organisational scan tools enable both purchasers and sellers to assess the culture and organisational structures and competencies early to enable human capital and culture planning,' he said. 'We agree that determining the value of the intangibles when pricing or valuing a company is a key acquisition capability.' Craig states, 'In many acquisitions the key assets acquired are intangible—that is, people, systems, structures and culture. Valuing and managing these assets effectively is critical in realising a businesses true (financial) value and setting it up successfully for sale.'

'For those companies and businesses that get the culture and leadership planning right, it becomes the enabler of the strategy whether that be to set the business up for sale or for long-term organisational initiatives,' said Ian Basser, CEO, Mettle Group.