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Culture in Mergers & Acquisitions

Culture in Mergers & Acquisitions

Recently on the Kinesis blog, we discussed marketing’s impact on business valuation. Your organization’s marketing maturity, infrastructure, and assets can make or break a business deal – as evidenced by Twinkie’s purchase out of bankruptcy after a veritable uprising from their loyal fanbase.

However, marketing is far from being the only consideration. There is another major contributor to the valuation process that often gets overlooked: company culture.

What is a company culture?

Before going any further, it may be wise to define what we mean by culture – since it’s the kind of term that can have wildly different descriptions depending on who you ask. It is not, for instance, a cake served at a monthly team luncheon for October birthdays. It isn’t a company picnic or corporate holiday party – although these can be present components.

Your culture, put simply, is the way people feel about working at your company. Do they wake up in the morning energized to go into work? Do they feel they are contributing to something greater than themselves? Do they enjoy spending time with their coworkers? Do they see a future here?

Southwest Culture

Your employees’ answers to these questions – conscious or unconscious – make up what it’s like to be a part of your team, and are a good barometer for measuring the health of your culture.

Why does company culture matter?

And why should your culture’s health be measured? In the not-so-distant past, culture was not a word in any CEO’s vocabulary – much less a strategic focal point. But in recent years, culture – and more specifically, employee engagement – have become a topic of national conversation.

That’s because caring for your employees is more than just the feel-goods: it has a quantifiable impact on performance. In its annual survey on the American workplace, Gallup continues to reinforce this message year after year:

Happy employees have significantly higher productivity, profitability, and customer ratings – and experience less turnover, fewer absences, and fewer safety incidents overall.

Company culture as a competitive differentiator

We’ve also spoken at length about the importance of differentiation as a marketing tactic – how are you meaningfully different from your competitors, and how do you broadcast that remarkability to the world?

One thing many business owners don’t realize is that culture itself – when done right – can act as this competitive differentiation. In an era when so few companies are getting it right, having a workplace where people love coming to work can be a major advantage.

Kinesis People & Culture

Warren Buffet summarized his investment strategy this way: “In business, I look for economic castles protected by unbreachable moats.” Are you crystal clear on why you are distinctly better than your competition? Does it have a deep protective moat that competitors cannot breach? If you’ve built a company culture where employees are engaged, you are already positioned well ahead of your peers.

The financial benefits of company culture

There are a lot of great reasons to devote resources to your organization’s culture – but the most compelling may be the tangible financial benefits.

Paul Spiegelman is the co-founder and former CEO of BerylHealth, and the co-founder of the Small Giants Community. In a recent podcast with Do Nothing author Rob Dube, Paul shared a remarkable story about how culture impacted the value of his business.

In 2010, he considered selling BerylHealth to a Chicago-based private equity firm – who offered them 9x their EBITDA. Paul ultimately ended up walking away from that deal, but with a newfound commitment to double down on their company culture. “We were in the call-center business, right? An industry known for boiler-room operations, high attrition, low morale, and low margins. We decided we weren’t going to run a business like that. We wanted to run a business where people love coming into work every day," Paul explains.

And so they did. Paul’s interest in company culture intensified, and he invested heavily in its growth. And the investment paid off: Just two years later, Paul was approached by a different company interested in purchasing the business.

“Our multiple when we almost sold to private equity was 9x our EBITDA, and we sold it at 22x. There’s no question that culture created the profitability, created our margins, allowed us to charge a premium price, and sell the company for a premium price.”

Investing in culture more than doubled BerylHealth's company valuation.

This achievement is especially impressive considering that the average valuation multiple for call centers is only 4-7x.

“We were able to sell our culture. They weren’t buying us just for the business we had or the platform we would build for them; they honestly believed in what we had built.” – Paul Spiegelman

And Paul’s story is hardly unique: The authors of “Firms of Endearment” profiled companies with a policy of putting their employees first – including Southwest Airlines, Whole Foods, The Container Store, and Harley Davidson – and tracked their return to shareholders over a 10-year period. It was an astounding 1,026%. Compare that to the companies in Jim Collins’ “Good to Great,” which returned only 333% during that same period.

The takeaway

There are many considerations at play when it comes to company valuation – but you would be remiss not to put a focus on employees and how they contribute to the success of the business.

While short-sighted advice might tell you to cut employee costs to add value, owners like Spiegelman know a more powerful truth: "The secret is understanding the relationship between creating a great culture and the impact on your customers and bottom line. We were able to charge 30 to 40 percent more than our closest competitors because we were able to sell not what we do, but who we are.”


Thinking about selling your business in the next 2-3 years and want to get ahead of your valuation? Looking to acquire a new company and need help evaluating culture strength as part of your negotiations? Or, have you just bought a business without a great culture and are hoping to maximize the value of your purchase? Kinesis can support you wherever you are in your business transition – give us a call today.

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