For many small businesses, acquisitions serve as an imperative growth strategy to expand their business and create value.  However, very few mergers and acquisitions are likely to succeed.  In fact, according to Harvard Business Review, between 70% and 90% of mergers and acquisitions fail.  Why do so many mergers and acquisitions fail?  Most mergers and acquisitions focus on the strategic benefits that are about cost-cutting and growing the business while neglecting the culture of the organizations. 

Often times mergers and acquisitions are terms that are used interchangeably, but they are quite different.  A merger occurs when two companies unite, where one company is absorbed by the other; whereas, an acquisition occurs when one company obtains a majority stake in the target firm, which retains its name and legal structure.  In either scenario, establishing a culture is integral to its success.

What is culture?

According to SHRM, "An organization's culture defines the proper way to behave within the organization.  This culture consists of shared beliefs and values established by leaders and then communicated and reinforced through various methods, ultimately shaping employee perceptions, behaviors, and understanding."  After leadership establishes a well-defined mission, vision, and values, the next step is to align the people, processes, and data (measures of performance) to the mission, vision, and values.  Both steps serve as integral steps to establishing culture.  MPWRSource partner, Joe Romello states, "The combination defines how customers are treated; how prospects are nurtured; how products/services are developed and delivered; how to deal with issues; and how to deal with vendors and suppliers.  All of these elements comprise culture."

Now that the term, culture, has been clearly defined, let's evaluate why small businesses choose a merger or acquisition.

Why do small businesses choose a merger or acquisition?

Small business owners choose mergers and acquisitions for business reasons, and these business reasons include:

• To stimulate growth 
• Gain a competitive advantage
• Expand market share
• Influence supply chains
• Stop competitive threats

Did you notice what was not listed in the list above?  People.  Mergers and acquisitions are strategic business decisions tied to an opportunity that may present itself at a networking event, dinner, golf event, etc.  When the opportunity presents itself, the small business owner thinks about the mission, vision, and values of their business, as well as their SWOT (Strengths, Weaknesses, Opportunities, and Threats).  If the merger or acquisition helps the business achieve its vision or eliminates competitive risk and makes good financial sense, the small business owner will be inclined to choose to go forward with the acquisition.  People may be considered, but the decision to merge or acquire a business is not based on people.  If one company seeks a person or people from another company, the company will attempt to poach that human capital.  This is why non-competes and mutual non-solicitation clauses are often present in employee and team contracts.

An analogy that relates well to this scenario is a family dynamic.  Parents often have to make difficult decisions based on the family as a whole.  For example, if a job opportunity presents itself to a parent that requires the family to move, the parent will not only consider what is best for themself but what is best for the entire family.  Parents don't ask for permission from their children to take a job offer.  Parents hold a vision for the family, and they make a decision based on their vision for the family.  They may take their children's opinions into consideration, but, ultimately, parents choose what is best for the family based on their mission, vision, and values.  The same is true in a small business.

So, if so many acquisitions fail due to neglecting culture, what can a small business do to alleviate the risk of an unsuccessful merger or acquisition?

Unfortunately, while leadership spends time analyzing and planning for the acquisition, not enough time is spent on defining and creating a culture after the merger or acquisition.  The existing cultures must evolve into a new culture.   The culture must be defined by the ideas, values, vision, and mission.  Then, everyone and everything must be aligned with the culture, or, as stated above, the people, processes, and data.  The elements that don't fit within the culture will ultimately leave.  

When two businesses become one, it is much like a marriage.  Each spouse comes with their own past, core beliefs (religion, spirituality, or other beliefs), vision (an idea of the future), and mission (the purpose of the marriage).  When spouses work together to build their expectations and culture of their marriage, beforehand and during, which requires communication, planning, and transparency, the marriage is more likely to succeed.  By evolving two individual cultures with the deliberate intention to create one culture, a strong marriage is created.  The same is true with small business acquisitions.

The odds that both small businesses have exactly the same culture are unlikely.  However, if both businesses hold very similar cultures (goals, values, mission, and vision) the odds of a successful merger or acquisition are greater.  Culture is the combination of a shared vision held by all parties through which goals are accomplished and the mission and vision are achieved while practicing and upholding similar values.  However, even if each business has similar values, they may not reflect those values through similar processes.  For example, one company may have very stringent and detailed processes that employees must follow in order to build a great customer experience, whereas the other company may achieve a great customer experience by empowering each employee to enact whatever is necessary to create a successful customer experience.  To increase the odds of success, each business should work together to create a new shared culture.    

To help achieve success after a merger or acquisition, an audit of the culture of each organization should be done by a third party.  A third party is recommended because it can be difficult to objectively assess the culture of your own business, as well as the business being merged or acquired.  Many times, while performing due diligence in determining if the merger or acquisition is a good strategic move, the buying business often assumes that the other business is similar, based on conversations; if leadership gets along, we can work together; and that they "know" their business.  However, none of these beliefs are generally proven. 

A third party conducting an audit can remove "the beliefs and feelings" from the decision and focus on the data.  If the audit reflects that the cultures are closely aligned, as well as where bridges will need to be built to align the areas that differ the leadership can build the culture of the business, thereby decreasing the probability that goals will be unattained.  

Typically the best way to generate buy-in from the people is to create a new culture that blends the best elements of each business, which may take a year or two to develop after the deal is signed.  This typically leads to the least amount of disruption.  If a business is merged or acquired, blending the culture of the acquired business with the buying business will lessen the chance that people will feel alienated.  Additionally, for the buying business, merging cultures offers the opportunity to improve existing cultures by adopting new values and processes from the acquired business.  

Mergers and acquisitions are often a surprise to employees.  However, if leadership continually communicates that the small business intends to continually look for ways to grow and remain competitive through various means, including mergers and acquisitions, employees will be less surprised.  Remember that transparency diminishes cynicism and distrust among employees.  Share the business vision for the future, so the people know that a merger and acquisition may be a part of the future.  Nobody likes being blindsided.  Through transparent and consistent communication, you build trust with your employees.

Once an acquisition has occurred, alleviate people's fear of change (the acquisition) by:

• Integrate and establish the new company's culture (mission, vision, and values) and demonstrate that the best aspects of each business will be adopted by bringing together leaders and other members of the businesses to collaborate and create the new company culture
• Support and acknowledge when the new culture has been reflected in the day-to-day operations
• Communicate consistently and regularly
• Address concerns immediately and don't be afraid to hold Town Hall meetings
• Conduct regular check-ins with employees by conducting surveys and small group/focus group meetings
• Appoint brand ambassadors throughout the organization from leadership to front-line employees and from the acquirer and acquiree 
• Never promise employees that things won't change because acquisition is, by nature, a fundamental change

Lesson Learned

While writing this blog, I drew upon personal experience.  Oftentimes, a decision to proceed with a merger and acquisition is based on the financial elements or, in essence, what "looks good on paper".  By focusing on these elements alone, we neglect to focus on planning what comes next for the people or the culture.  Have a written plan in place for after the acquisition.  Write everything down to get clarification and organization.  Each party should write down its mission, vision, values, and goals, and each party must clarify how the mission, vision, values, and goals will change.  For example, will the acquiree be expected to adopt the acquirer's culture?  Will the acquirer be expected to adopt the acquiree's culture?  Will there be a merger of cultures?  Before announcing the merger or acquisition to employees, vendors, and customers, be able to explain the benefit of the merger or acquisition, not only to the business but to the people.  Describe how the merger or acquisition will positively impact the people who WILL BE affected by the acquisition.  Be honest.  Mergers and acquisitions bring forth change but highlight how the employees, vendors, and customers will benefit.   Remember the first communication(s) after the merger and acquisition are the first action items to building the new culture.

Every merger and acquisition comes with surprises, but well-planned and consistent communication that demonstrates empathy, integrity, and transparency will begin to create a healthy culture for all parties involved.

I leave you with the following quote by Peter Drucker:

"Culture eats strategy for breakfast."