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March 13, 2024

Performing Cultural Due Diligence to Better Understand the Target Company

Most of the biggest M&A failures of all time are caused by culture clashes. Both companies cannot simply co-exist with each other, and instead of creating more value, they destroyed both of their businesses. This is why cultural due diligence is crucial in M&A.

In this article, Ken Bond, Head of Corporate Development at Cetera Financial Group, shares his expertise on how to perform cultural due diligence to better understand the target company.

I wouldn't necessarily walk away from every deal that's got a bad cultural fit, but the integration plan has to adapt and accommodate the findings of the cultural diligence.” - Ken Bond

The person responsible for cultural due diligence

According to Ken, culture is an important consideration that has to drive the integration plan. During diligence, there is already a great deal of cultural diligence. Problem arises when folks don’t aggregate the diligence findings from a cultural perspective.

While the corp dev team is responsible for executing diligence, HR is a big portion of evaluating culture and should own an understanding of what the cultural diligence yields.

Executing cultural due diligence

If cultural diligence is done right, there is no need to modify the diligence plans dramatically. It’s about pulling together the findings that come out of those functional diligence efforts and evaluate them from the perspective of what insight into culture they provide. You can then form a view around the key attributes of culture, such as decision-making and community.

Another important component of cultural diligence is that the acquiring entity also needs a similar level of evaluation. For global organizations, each of the countries almost always has its own microcosm of culture. When both the target and acquirer get evaluated, it’s easier to understand where the friction might be during integration.

Using playbooks

Each organization builds their own playbooks based on past precedent and how they're organized. But playbooks should never be rigid and should always adapt to the circumstances of each transaction. They're really more like guidelines or starting spots, and then it has to adapt to the peculiarities of a transaction. 

One of the peculiarities of the transaction is the culture of the business, which is how they make decisions, how they manage their people, how they push risk, their willingness to take risks, and how they reward or punish mistakes. All of these have to influence the integration plan.

Successful partnership between corporate development and integration

Those that performed the due diligence should build the integration plans. Everyone should be one virtual team, even if they sit within different functional areas. The people responsible for integration should be the program managers managing the due diligence activities as well. They should be the exact same individuals so that they deeply understand the diligence findings and the plan to mitigate them.

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