Soft Due Diligence

soft due diligence, mergers, mergers and acquisitions, pre-sale diligence, staging a business for sale

Once a merger, joint venture or even significant international expansion gets under way people get scooped up in the craving to count things; how many, what are the attached liabilities, how can we reduce them, what are the expected synergies and so on. We typically look at these values in terms of current cost in the manner prescribed by traditional accounting methods. We spend less time on the potential for value creation or more importantly value destruction from the resources purchased.

Studies have indicated that a high percent of business combinations do not deliver the value promised because of the inability of employees to effectively work together.

It requires enormous energy to bring a transaction to completion and usually only after the celebrations are done do thoughts turn to how we plan to utilise acquired employees.  Meanwhile the employees in question are polishing resumes and working the recruitment market.

If the objective is simply to acquire assets then there is little downside but don’t underestimate the damage a departing group of disgruntled employees can do on their rush to the exit. Most transactions even if only through a transition, require employees to integrate and work together.

What was it that made the target business so attractive? The workers and staff who are now looking for new employment and who will take with them significant enterprise knowledge? The features that attracted the acquirer, created by this engaged team are now in the process of disappearing.

People are typically the most important asset in any transaction and will make or break its success. To ensure that they contribute to its success there needs to be what we call a “soft due diligence” comprising:

  • Talent Assessment – before documents are signed key individuals in the organization need to be identified. These aren’t necessarily executives or senior managers but employees that actually make the business the success it is. They may be engineers, technicians or supervisors, they may have proprietary product knowledge, they may have technical know-how, or they may be the organization’s effective leadership e.g. those who others look to for direction, who in effect lead or reflect the essence of the organization’s culture.These are people that need to be encouraged to stay until what they do, how they do it and what they know is completely understood. These are the folks who could damage the transaction most by taking their knowledge or experience to a competitor.They may occupy apparently innocuous positions and not appear on any retention incentive list but these individuals must be identified and retained.
  • Cultural Assessment – understanding how the target organization goes about its work is crucial. Our partner Natalie Richter Global, with whom we undertake cultural due diligence studies, describes it as “the process of figuring out what a company does and why they do it in the way that they do”. The purpose of this exercise is to prepare and aid the understanding of those responsible for bring the two teams together. It’s not about who has the best leadership model it’s about recognizing the difference.An understanding of how work is organized, conducted and communicated in the acquired organization is not knowledge acquired by reading the website. Natalie says that the key is to look at what actually happens on a daily basis inside each company by analyzing interpersonal interactions.   She describes it as the ability to recognize Communication preferences (What is said, how it is said and why it is said in the way it is), Learning style preferences (how training and development is achieved), Motivational preferences (how are people made to feel engaged) and Performance management (how employees receive feedback).
  • Future State – with this awareness about both organizations integration risks can be mitigated by approaching the combination in a way in which both teams feel comfortable. Clear explanations of how processes are changing and why, will ensure that engagement remains high. As a result of this analysis many merged organizations adopt a new style, so as not to favor buyer or seller.Early and clear articulation of the goals of the merger are critical. Every employee should be provided with what they need to know to be a success including who they need to work with and why.

Understanding cultural dynamics lies at the heart of achieving desired outcomes. Companies articulate their corporate culture externally on their website but that does not describe what they actually do and why they do it in anything like sufficient depth. A “soft due diligence” conducted prior to and through completion will enable anticipation of the workforce’s reaction to different approaches and be essential in mitigating downside risk and creating value.

No one can articulate the upside potential of a transaction better than a proprietor and we can help avoid the underachievement that appears to plague many transactions and expansions and help vendors secure greater value for their business by ensuring that their “human capital” is being fully utilised.

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