Attending the Booth-Kellogg Entrepreneurship Through Acquisition conference in Chicago as a sponsor last Friday sparked a number of thoughts about culture as it pertains to Search Funds.
Beyond a deep and clear understanding of a target company’s financial performance, an assessment of culture is of prime importance. Cultural fit is imperative for the entrepreneur-leader to succeed in operating the acquired company. But “fit” has multiple dimensions and doesn’t imply that the new leader expects to leave the culture unchanged.
The Searcher should evaluate the set of values articulated by the company’s founder or incumbent leader and assess how well the management team has been living these values. Will the entrepreneur-leader have to repair the company’s culture to drive growth and profitability?
Identifying the need to change the culture may be a red flag warning against proceeding with the acquisition—or it might indicate significant opportunity. If the company has solid technology and competitive differentiation, but lacks a high-performing culture, there may be unrealized value ready to be unlocked. Can the entrepreneur-leader unleash the company’s full potential by modeling urgency and bias for action while having the patience and stamina to truly reform the culture?
The Searcher identifying a need for culture shift should be on the lookout for any deep-seated resistance to change within the organization. Ideally, employees will share a commitment to the enduring values of the company while being open to changes in process and ultimately will embrace positive change.
To succeed in changing a culture, one must be mindful not only of the formal levels of leadership but the informal leadership levels that shape the culture. The formal levels are readily understood: At the top is the Creation Level—the CEO or founder who establishes the vision. Next is the Interpretation Level—the C-Suite executives who interpret the vision for the various divisions of the organization. The third level of leadership is the Implementation Level, the managers who execute the vision as it has been interpreted for them.
Informal leaders are not tied to these levels. They have a dynamic charisma that attracts others who feed off their cues, shaping the culture for good or for bad. Keep your eyes open for those people who others gravitate to—at any level of the organization. An entrepreneurial leader who makes the mistake of ignoring informal leaders is destined to fail. When formal and informal levels of leadership are fully in alignment, the leader’s vision can be realized. Otherwise, cultural cross-currents will sabotage the vision and strategy. Culture directly affects employee morale which, in turn, affects performance.
If there is a desire to grow the company not only organically but also through acquisitions, be especially mindful of a potential clash of corporate cultures. This is one of the main causes of business failure.
Assessing these “human factors” requires different skills than those required for financial performance assessment. This is the art that must be combined with the science of objective financial analysis. At Virtas Partners, we bring both art and science together to help Search Funds make complete and accurate assessments of a target company’s performance and potential, to grow the company’s earnings and, ultimate, to exit profitably.