6 Reasons A Buyer’s Business Culture Matters For Sellers

By: Jeff Heybruck

Selling a business is more than a financial transaction. It’s a culmination of years of sacrifice and personal investment. Founders and long-time small business owners nurture a unique business culture that reflects their own values. This culture (and protecting it after the sale) can be overlooked in the rush to secure the highest possible sale price. In fact, studies have shown differences in business culture as one of the dominant barriers to successful acquisitions and mergers.

Studies have shown differences in business culture as one of the dominant barriers to successful acquisitions and mergers.

We’ve all seen large corporate mergers that failed for this reason: AOL & TimeWarner; Chrysler & Mercedes Benz. Heck, Quaker Oats turned $1.7B into $300 million in just 27 months when it acquired Snapple. These brands all had national or international recognition; Lucrum focuses on slightly smaller clients but the lessons are still the same (albeit with a couple less zeros).

Many businesses are sold with an “earn-out” where the seller is paid a portion of the sales price based on hitting certain performance metrics. If the culture of the new, merged company is toxic or too much of a change (even if still positive), it will have a negative effect on employee morale. We’ve seen where the employees who made the business “special” and worthy of being acquired flee and the new faces don’t reflect the original company values. The turnover distracts management, including the seller, and it often results in a decrease in profitability in the year(s) shortly after the sale, which is exactly the worst time for the seller as it negatively impacts their earn-out.

One of the hardest things for a buyer and seller combination to evaluate is culture. According to Jay Offerdahl with Viking Mergers & Acquisitions, “Buyers typically rely on turnover, margins, and growth to judge culture. Most companies with great cultures are going to have better-than-average growth and margin percentages. Giving a “culture score” during the due diligence process is challenging because everyone is in the honeymoon phase.” Let’s understand the reasoning behind those three criteria:

• Turnover – reviewing employment records to gauge turnover (more turnover equals lower culture quality).
• Margins – a business with consistently high margins likely is operating as a team and pulling in the right direction.
• Growth – a business exhibiting 15-20% annualized growth year over year means the team likely buys into the same vision or has a strong visionary leader.

Finding a buyer who respects and preserves the business’ culture has several advantages to the seller. Our CFOs have put together a list of those advantages below:

1. Preserves The Business’s Legacy: For many sellers, their business is more than a profit-generating center – it’s a legacy. If the seller has built a small business with a strong and positive culture, finding a buyer who respects and upholds those values helps preserve the business’s legacy and the positive impact it has had. This piece becomes especially at risk in the case of selling to large acquisition-oriented entities or private equity firms. These buyers are laser focused on acquiring companies, quickly improving their performance and selling them for a profit. To use an analogy in real estate, it’s the difference between selling your home to another family vs. an investor that’s looking to flip the house.

2. Protects Employer-(Former) Employee Relationships: Knowing that employees will be well-cared for post-sale provides peace of mind for the seller. This is especially important for owners who have built strong relationships with the people that work for them. Even after the sale, the seller may wish to maintain relationships with certain employees. If the seller hears that they aren’t happy under the new ownership, it can put stress on those relationships. Knowing those employees are thriving in a positive environment can be personally rewarding.

   According to Adam Petricoff with VR Business Brokers, “A company’s greatest asset is its people. Any buyer who doesn’t take deliberate steps to ensure minimal staff turnover after an acquisition runs the risk of damaging the very asset that made the company worth acquiring in the first place.”

Business culture
[biz-nis] [kuhl-cher] noun
The shared beliefs, values, and behaviors that characterize the way a company operates, influencing employee interactions, decision-making, and overall work environment. .

3. Fosters Potential for Long-Term Collaboration: It’s not uncommon for the seller to remain in some sort of role with the company for 1-3 years after a sale. If the seller remains involved in the company in any capacity (e.g., advisor, board member), a positive buyer culture makes that experience more enjoyable and productive. When the seller feels valued and respected within the buyer’s culture, they are also more likely to remain motivated and engaged in their role. This sustained engagement benefits both the seller and the buyer.
4. Provides A Sense of Personal Fulfillment: For many sellers, ensuring the well-being of their employees, and the reputation of the company as a whole, is a deeply personal and ethical consideration. Finding a buyer who shares these values can provide a sense of fulfillment and satisfaction after the sale. Newfound financial freedom and the chance to pursue other passions can be a highly rewarding part of a sale; but even money may not be able to counteract the anxiety that comes from knowing that the business is now in the hands of people who are treating employees poorly.
5. Protects Personal Reputation: The seller’s individual’s identity is often tied to the business. If the buyer has a good reputation and is known for its good work culture, it reflects positively on the seller’s judgment and the overall value they created within the company. People talk. The seller will be happier if the word on the street is that they sold to someone else that also shares their stellar reputation and the business and its people are still thriving.

6. Tees Up A Smoother Transaction and Transition: A buyer with a shared culture is more likely to successfully integrate the acquired company and achieve long-term success. This increases the likelihood of the seller receiving the full value of the deal and achieving their financial goals.

   Happy and engaged employees are also more likely to be cooperative and supportive during the transition period. A negative buyer culture can lead to employee dissatisfaction and potential legal issues. Choosing a buyer with a good culture is important. According to Petricoff, “Buyers who try to come in and impose their culture instead of understanding the existing are, in a sense, shooting themselves in the foot. Their culture may be positive but too much change too quickly can be dangerous. The successful buyers seek to understand the existing culture and make changes slowly, even if their methods are better.”

Offerdahl has similar advice, “in the end, the buying group is responsible for maintaining culture. If they can’t, they will lose much of the value they paid for.” This is good advice to consider when looking for a good culture match.

If you’re looking to sell your business, Lucrum has experience in helping small business owners create and successfully execute their Exit Strategy. Our accountants can also help prepare business financials before selling the business. If you have further questions, please feel free to contact our CFOs and Business Advisors To better understand the value of your business and what a potential sale might look like reach out directly to Adam or Jay.