Guest Post – Before Merging, Always Evaluate The Fit of Your Most Valuable Asset

By Tyler Palko

A huge thank you to Tyler Palko of Solutions 21 for allowing us to share their content in this guest post!  For more information about Tyler and his team, please visit their website.

Before Merging, Always Evaluate The Fit of Your Most Valuable Asset

Throughout the past year, businesses have had to get creative. Companies in 2020 shifted the way they’ve operated for years—decades even—to adapt to the new reality. Transitioning to remote work allowed organizations to continue business relatively normally.

During this challenging period, many organizations have found ways to innovate and invest in themselves in order to perpetuate their success through this and possible future global crises. Finding ways to view these challenging times as opportunities for creativity and growth has opened up previously ignored doors.

In 2020, we at Solutions 21 researched and learned even more about the importance of leadership development. Of course, developing your employees can increase their soft skills and create a lasting culture of elite leadership. Still, there are other monetary and valuation impacts of having a solid leadership team and pipeline.

In the next few years, millions of small- to medium-sized businesses will transfer ownership. While many decision-makers may have personal retirement plans, it’s also imperative for them to have continuing plans for their companies and employees down the line. Sometimes, these plans include mergers and acquisitions.

Mergers and acquisitions can come with unique sets of problems. At Solutions 21, we have worked with several companies where the organization that our client wants to merge with looks good on paper. Because of this, an ownership group or management team thinks it should be a seamless transition. That’s not the case. According to a study by Deloitte, over 80% of these transactions fail because of cultural fit and lack of smooth integration of multiple teams.

When businesses are getting ready to go through a merger or acquisition, a lengthy due diligence process occurs. To determine the value of a business, buyers look at the cash flow of a company, the sector it operates in, the potential for growth, the company’s clients, its products, and many other factors.

After taking a thorough look at a business’s financials, the valuation process also looks at the leadership team, its effectiveness, and the depth of the leadership development pipeline within the rest of the company. Leadership quality can have a 25-30% impact on market valuation in the eyes of an investor.

Even with buyers looking at the quality and depth of current and future leadership, rarely do companies consider the corporate cultures that each business may possess. Often, these two corporate cultures in the merging companies are entirely different from one another. When evaluating and valuing a business as a financial institution, this can easily get overlooked. However, how entire teams integrate into a single system may be even more important than how financially stable a company is and will continue to be.

It’s no secret that a company’s most valuable asset is its employees—the people who truly make the business run. Employees have whole cultures, competencies, and unspoken standards. When merging two companies together, ensuring the cultural pieces and core competencies of the people fit together in a meaningful way is a key component to the integration ultimately being successful.

With the ramifications of COVID still out there and the generational shift of the Baby Boomers exiting the workforce at such a rapid rate, the workforce will look like nothing we have ever seen before. It will be even more important for businesses and ownership groups to get this integration transition down to a science.

Contact Tyler Palko for more information.