Day 2 of the Echelon Deal & Deal Makers Summit included a fantastic session moderated by Katie Johnson of FiComm Partners with Herbers & Co. CEO Angie Herbers and Limitless Advisor CEO Stephanie Bogan. Titled, “Dealmakers Guide to Organization Design and Behavior,” the session covered the ever-elusive topic of culture and its significant impact on the success or failure of most M&A transactions. The speakers advised that when it comes to M&A, the math of the deal is not and should not be stripped from the behavioral side of the transaction. They pointed out that the goal of every M&A transaction is to 1) improve cash flows (i.e., make more money) and 2) improve on the success that both buyer and seller were achieving ahead of the transaction (i.e., make 1+1 = 3). But as Herbers stated, “It will be a significant drain on future cash flows if the acquired firm does not fit well into the buyer’s organization.” In that sense, culture is not the “touchy-feely” aspect of M&A that should be viewed in isolation—it is in fact the primary driver of future cash flows when evaluating the success of a merger.
The session participants pointed out that relationships—whether romantic, business or familial —erode when expectations of both or either party are not met. If a seller feels a promise was made during the courting phase of the transaction that they were going to become a significant voice on the investment committee after the merger was completed, and that promise is not fulfilled in the mind of the seller, problems will undoubtedly arise. The business suffers and energy is quickly drained as the buyer and seller work through the hurt feelings surrounding ‘he said/she said’ arguments and sorting out what was truly promised vs. what each party understood. To that end, the best risk mitigation tactic buyers and sellers can take is to put culture first when contemplating a potential merger, and to not, under any circumstances, allow the number of zeroes in the acquisition price divert attention from the needs of both parties.
As Bogan stated, “M&A is all about the psychology of change.” Success will hinge not on the structure of the earn out or the calculation of EBITDA on which the multiple is applied; instead, it will depend on how each participant can individually navigate the change their role and their firm must undertake as a result of the merger. Neither party to the transaction is necessarily ‘right’ or ‘wrong,’ they may just be different. And as the speakers noted, “When two operating systems are different and you attempt to mash them together, things can get ugly very quickly.” This is where personality assessments such as Myers-Briggs or DISC can come into play—what tools can buyers and sellers rely on ahead of a merger to determine if the cultures of both firms will mesh cohesively?
Herbers astutely pointed out, “All problems at your firm stem from unmet needs.” She advised buyers to drive honest conversations with sellers ahead of a potential transaction and simply ask, “What do you need? What do you want? What do you care about?” The problem is that most individuals, whether contemplating selling their business or simply deciding where they want to go for dinner on a given evening, cannot answer these questions for themselves. When the added complexity of money is thrown into the mix, many sellers simply respond in a way they think the buyer wants them to respond. It is incumbent on the buyer to allow the seller to feel safe in answering these critical questions, and if they truly can’t answer, encourage them to simply guess what they need, want and care about. And if a seller cannot align with the needs and wants of the buyer, they should have the bravery to walk away from the potential acquisition and find another seller. Forcing a square peg into a round hole will not go well for anyone involved.
Bogan is famous for stating, “When the vision is clear, the decisions are easy.” If a potential seller does not match the vision of the buyer, both parties must acknowledge that fact and move on. Many private equity-backed RIAs feel significant pressure to get more deals done, but in the end, no one wants the headache of unwinding mergers that don’t significantly drive more cash flow to the bottom line. There are many indicators that reveal the potential success of an M&A transaction, but the best and most critical clues are revealed on the behavioral side of the deal.
Matt Sonnen is founder and CEO of PFI Advisors, as well as the creator of the digital consulting platform, The COO Society, which educates RIA owners and operations professionals how to build more impactful and profitable enterprises. He is also the host of the popular COO Roundtable podcast. Follow him on Twitter at @mattsonnen_pfi