The cultural dealbreaker in advice M&A

Two commentators have shared why cultural alignment can be the biggest deal breaker when it comes to advice M&A.

With more and more advice firms exploring M&A opportunities as they look to scale up their businesses, it may seem like an attractive option, but it requires a significant amount of due diligence to ensure the two parties are a good fit. 

Recent advice M&A deals have ranged from large deals such as CC Capital acquiring Insignia Financial and LGT Crestone acquiring the advice arm of Commonwealth Bank, to smaller deals such as Coastal Advice Group merging with Calder Wealth Management. 

Other deals have seen advice firms take a stake in another player such as The Australian Wealth Advisors Group taking a 20 per cent stake each in OneLedger and B2B Invest, and Shaw and Partners taking a 75 per cent stake in New Zealand-based Investment Services Group.

Depending on the circumstances and structure of the deal, firms may wish to retain their existing, separate identities, meld two cultures into one firm, or disband from their old ways and formulate an improved culture. 

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Speaking to Money Management, Caitriona Wortley, head of strategic growth at Drummond Capital Partners, said: “We work with advisers and act as a sounding board for them, sharing best practice from our partner firms. We find bringing cultures together can be challenging and something that definitely takes time to enact. 

“You get firms which have been bolted together; some might look after high-net-worth clients, while the other looks after retirees, and they need to find a common ground to bring the two investment philosophies together.
“The culture and the dynamics between the two firms can make or break an M&A deal.”

Commenting on a Netwealth podcast, Kon Costas, managing director at The Principals Community, said it can take up to three years for two firms to be successfully integrated and gain scale efficiencies.

Consultancy EY defines a successful “cultural synergy” as the harmonious integration of two firms to enable the retention of skills, product and talent that will deliver long-term value creation, and something that should be clearly outlined at the outset. 

“Planning for post-deal culture ensures cultural differences are harnessed to create synergies that positively impact people’s experience and performance. 

“What is important is for leaders not to make an assumption about what cultural synergy looks like. The desired cultural end state must be explicitly decided on and clearly defined,” it said.

Costas agreed with Wortley that cultural alignment could be the biggest factor that saw a deal fall apart.

“The most successful ones understand each other’s businesses. They enter into this arrangement knowing that they can work together. Your culture and standards have to be similar, how they give advice needs to be similar, how they deal with clients. Staff need to understand why this is happening and where the career opportunities are; they need to be on the journey with you.

“It is very difficult to bring chalk and cheese together, so get to the crux of the matter straightaway or you could be pushing things up a hill.”

In the event two firms discover they are unable to work together, Costas said the best outcome is to cut the deal and avoid wasting any more time.

To ensure a deal will be successful, he recommended substantial due diligence is conducted as well as appointing a dedicated person to focus on this, and reporting back to the principals to ensure any problems are ironed out before a deal goes ahead. 

“A third party can look under the bonnet and do investigative work. They have that expertise to look at the governance and the process, and be able to share those findings with both parties openly and determine a recipe going forward.”