Due Diligence Includes Company Culture
Though the economy has shown some signs of slowing, opportunities continue to present themselves to franchise owners looking to exit or grow, as well as those newcomers looking to enter the space. It's important to pursue proper financial due diligence in order to determine the proper value and the fiscal health of the transaction.
Engaging in the financial due diligence process is critical to the buy/sell transaction. Just as important, and some might say, more important, is engaging in due diligence focused around the culture of your organization. The deal needs to be fiscally sound and in order for you to experience a smooth transition and ensure long-term success and sustainability, you have to look internally at your people, relationships, leadership bench, and all sticky areas tied to human capital. Let's walk through a real-life transaction in which things did not go as expected for either side of the transaction.
The story starts with a multi-unit franchise owner looking for the "what's next" in regard to the legacy he had built. He had spent more than 15 years building a successful portfolio of brands, a team of dedicated long-term employees, a history of long-standing returning customers, and a strong reputation in the communities in which his locations served. Life happened and unfortunately, he and his wife divorced, and he was forced into selling his franchises.
He was courted by a couple of other larger franchise owners who wanted to diversify their portfolio and grow in his area. All of the financial items were in order and he even made the decision to engage in doing his own sell-side financial due diligence in order to identify any potential red-flags or areas that could keep a deal from being successful. He thought he had done all of this homework.
Fast forward a year post-sale and although he was no longer involved in the business, he felt the lasting effects of his decision to sell. During the sales process, he was not solely concerned with the amount of money he was getting on the deal (although it did, of course, have a big impact). What concerned him more was protecting the legacy he had built, which meant protecting his employees and his customers after he was gone. Unfortunately, he missed the one big step of doing some due diligence on the culture of the organization purchasing his franchises. Likewise, the buyer had a tough time with the transition and the loss of people and customers, and with it, a tarnished reputation in the community.
All of this could have been avoided if the parties agreed to include a cultural due diligence assessment as part of the deal. That is intentionally comparing cultures, mission, and goals to determine if they are in alignment as much as the financials are. As we all know, the people and the customers are what keep the business growing, and if we lose good talent and the customers do not come back, it can be fatal.
Here are three steps to follow to ensure you protect your legacy when selling or buying:
- Know where you stand in the areas of human capital. Before you even consider a transaction, know where you stand with the culture, your people's relationships, and the community. If as the buyer you are not worried, know where the seller stands about their people. As the seller, if your people (employees, family, and customers) are important, be sure to make them a consideration in the courting and research stages.
- Know where you stand in the areas of culture and organization. Before you discuss financials and values, ask questions regarding the makeup and daily environment of the organization. This can be done in the "courting" phase as it does not require any non-disclosure agreements. Ask questions to determine if the organization aligns in mission, values, people management and development, and of course type and importance of the customer relationship. Take advantage of reviewing the locations and brands to see what kind of reviews they are receiving (as both the buyer and seller), a lot of information can be gleaned through online reviews.
- Know where both sides stand on the terms and conditions of the deal. Before you sign anything, make sure you have terms in writing as it relates to the outcome of the combined culture of the organization. For example, a communications plan to employees and customers, what to expect during the transition, and importantly, after.
When engaging in a buy/sell transaction it is easy to get caught up in the financial aspects of the deal. However, to protect the future of the organization and the core components of the people, customers, and relationships, engaging in a cultural due diligence assessment can make the transaction smoother.
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