Cultural fit is key to buying any business
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Dealmaking is on the rise again, after an understandable lull in 2020. Last week we saw Etsy, the online marketplace, agree to pay $1.6 billion for Depop, a UK-based second-hand clothing app, loved by Gen Z shoppers. I wish them well. But for anyone who owns a business and is looking to grow, it is worth remembering that not all deals are destined for great things.
A sobering statistic that I always recall when tempted is that eight out of ten acquisitions destroy shareholder value. They are also often initiated for the self-aggrandisement or ego of the chief executive. So I ask myself why can I beat the odds? Am I doing this for the right reasons?
A common problem, as we discovered when we acquired a struggling arboriculture utility business in 2013, is that cultures can clash. It took us four years to get that merger on track. We learned a lot, not least about ourselves and how to deal with different people and expectations.
Long term it was the right decision as it now forms an amazing part of our business. But there was a huge amount of blood, sweat, tears and balls dropped in other areas at the time.
We are now a more experienced leadership team. We have been through a number of acquisitions and learned the hard way, which is perhaps the only way to really learn. But this process has taught us what to look out for when buying and building businesses. I believe organic growth is by far the best way to grow. But sometimes good deals come along that can really accelerate your trajectory.
Here are our top tips to making acquisitions work successfully.
What to buy? It’s not a sweet shop
As the much-publicised decoupling of Softbank and WeWork illustrated, not everything that glistens is gold. While it’s good to be opportunistic, bargains are not always as bright and shiny and cheap as you might think.
Start by imagining that you’ve done the deal and map out your market, identifying where there is new business to be won. From here you can look at possible synergies. Will the acquisition help you to grow, develop new products and services, secure new customers and enter new geographical regions? This is the really tricky part. In my opinion, most acquisitions destroy shareholder value because they over-value those synergies. My advice is to take a very conservative view and stick to your guns during the negotiation.
If the owner and senior leadership team are coming with the business it’s also important to consider the potential impact of an earnout. It could impact any positive changes you want to make. Founders can, of course, also add value in terms of insight and continuity, but it’s important to weigh this up with the potential for disruption and delay in building trust with new employees.
Then kick the tyres — as that ancient law caveat emptor says, it is up to the buyer to make sure what they are buying is what it seems. Invest time and really get to know the business.
The problems we had in integrating people after our acquisition in 2013 changed how we viewed buying businesses. Too many of the people that came with the company just did not think in the same way as we did. Our culture of inclusion and shared rewards, all pinned around a sustainability ethos, demanded a certain mindset. It wasn’t a cultural fit.
We negotiated a knock-down price for the business, discounted to net assets, but with it came a whole host of issues. I learnt a lot about leadership during that period. In particular, when you have a failure in leadership, you recruit the wrong people, and you lose any good talent you have. You can then find yourself overpaying the people who stay simply because you have a retention problem. That was the situation that we were in from day one in this deal. Since it was a trade and asset sale out of a larger PLC, we also had the fun of no systems, HR or finance either.
So really double down on checking for good cultural fit. It is as important as financial due diligence. It means looking people in the eye. Ask yourself hard questions: do you really trust them? And assess their commitment to customer service. You will typically find you are dealing with a group of people with mixed abilities and attributes. What you don’t want is the ratio of strong to weak to be detrimental to your culture. You can handle a few people that aren’t aligned, but when the scales are tipped towards a culture clash then you have to be prepared for some painful times.
Of course, it’s important not to get too addicted to an acquisition. If the facts start to say you shouldn’t do it, don’t. Be disciplined and pull out and live to buy another day — something I have certainly learnt to my cost.