You would not think of tying your professional and financial life to others through a merger or a partnership without careful due diligence. Due diligence involves doing a premerger analysis to uncover risks and avoid unpleasant surprises. This can require hiring attorneys to pore over existing contracts and legal arrangements, while having an expert go over the financials.
A statistic we often quote because it is so compelling is that, even with this pre-work, 70% of mergers fail, and of those that fail 62% do so because of partnership conflict. Since conflict can be so destructive and expensive, investing time and resources in cultural due diligence is very worthwhile. Cultural due diligence is making sure that you will be able to work together productively because, as an organization, you are aligned in values, mores, and standards.
Why is this important, and why is it worth spending money on? The cost of a failed merger goes beyond the legal fees to unwind and start again. It can damage your reputation with clients and staff, take your focus off more important business development, and be a huge waste of time and effort, even if it does not get to the point of lost client revenue (which is a possibility.)
The earlier you start in the premerger process, the better. What better way to signal your commitment to a lasting and successful agreement than by raising and then addressing these issues?
How is this done?
Write down your goals for the merger: Your short and long-term objectives and specific wants/needs as an outcome as well as your alternatives. Then, look at the benefits and risks of a partnership from the perspective of the other party. This will help you clarify where you are aligned, and where you may not be.
Formally assess the partners: In our research we found that firms that had been successful in adding partners and merging had employed a formal psychometric testing process. This has been the impetus for some great conversations and clarifies how to best work with other partners.
Don’t ignore red flags: When your merger target looks great on paper, you may instinctively discount negative inputs. This is also known as confirmation bias, a well –documented phenomenon where you put more weight on information that is consistent with what you believe and ignore information that conflicts with your point of view.
Have a neutral third party facilitate a conversation: A skilled facilitator will make sure that key issues are raised and then addressed, especially potentially contentious issues. It can be tempting to avoid these issues to be polite or to avoid souring the deal, but it is certain to be those issues that come back again.
Some of these items you can do yourself, others require outside help. The time spent upfront could end up saving you from disaster.