IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Melissa Davis of The Theodoros Group (https://ttgway.com/):

Culture is the Deal in M&A – Why the Soft Layer Decides the Hard Numbers

The deal was clean on paper: strong margins, growing revenue, a buyer who liked the story. What the spreadsheet didn’t show was an organization built around one founder’s instincts, a team that had never absorbed real change, relationships that lived in a few people’s heads. The buyer couldn’t see it in the financials either. But they felt it in diligence, and they priced it in.

Most deals don’t come apart over the numbers. They come apart over culture: the values and practices that decide whether the business still works the morning after close. McKinsey found that 44% of M&A leaders name cultural fit and friction as a top reason deals fail, and 70 to 90% of merged companies fail to deliver their intended value, much of it traced to cultural misalignment rather than the balance sheet.

Why buyers feel culture before they can name it

In diligence, a buyer is estimating how much of the business survives a change of ownership. They can’t measure culture directly, so they read proxies: how concentrated the relationships are, how the team has handled change, whether decisions run through one person. When the proxies signal fragility, the buyer doesn’t walk. They protect themselves with a lower multiple, a bigger earnout, a longer lock-up. The discount is the culture risk, priced. And the risk is real: EY finds 47% of key employees leave within the first year of a transaction, a loss it estimates at 10 to 15% of the purchase price.

The culture that builds trust fastest

“Good culture” is too vague to price. The culture that earns a buyer’s confidence fast, and holds a team through a sale, has a specific shape:

• Employee experience is the leading indicator of who stays, and the team staying is what the buyer is paying for.
• Transparency turns a sale from a threat into a managed change, the single biggest lever on first-year retention.
• Inclusion leverages talent: spreading relationships and decisions beyond one or two people is risk reduction, not a value statement. It dissolves the exact concentration risk buyers’ price out.
• Minimal disruption is engineered, not lucky: a culture that changes without fracturing is one a buyer can integrate without losing what they bought.

These aren’t soft virtues. They’re the mechanics of trust, and trust is what shortens diligence, steadies the multiple, and keeps the team intact long enough for the deal to pay out.

The earnout is a culture bet in disguise

Nowhere does this cost the seller more than the earnout. SRS Acquiom data shows earnouts pay out about 21 cents on the dollar and are contested at least 28% of the time, yet they’re common in middle-market deals, tying 20 to 40% of the price to targets the seller no longer controls. They rarely fail on the market. They fail on people: key talent leaves, the team that hit the numbers scatters, the deferred money evaporates. An earnout is the seller betting the culture is durable enough to keep performing under new ownership, a bet most lose for reasons they could have fixed before signing.

Payroll and classification matter too. Misclassified workers become escrow holdbacks fast, and the Department of Labor recovered over $259 million in back wages for nearly 177,000 workers in fiscal 2025. But that’s table stakes, fixable in a focused sweep. Culture takes time and moves the multiple.

The deal continuum: what carries value across close

Most preparation advice treats culture as something to tidy up before market, then hand off. But a deal isn’t a moment. It’s a continuum, and what has to survive it is the team’s power to perform and decide without the founder in the room. That capacity is the asset changing hands: built before the deal, tested at close, compounding or collapsing after.

Before the deal, it’s a risk to reduce. A workforce conditioned for change, with decisions spread across a trusted bench and relationships beyond the founder, is a lower integration risk, and buyers credit it. This work takes longest to prove, because a buyer can tell real change from recent coaching. It needs lead time, and it’s where the multiple moves.

At close, it’s most fragile. This is the handoff, when decision-making either keeps flowing because the team was built to carry it, or seizes up because it ran through someone now negotiating their exit. A business where the power to decide is shared survives the moment the buyer watches most closely.

After the deal, it’s value to capture. Most of what a buyer paid for is won or lost in the first hundred days, when two ways of working knit together or grind against each other. Done right, retention holds and the earnout pays. Integration isn’t the cleanup after the deal. It’s where the deal’s value is decided.

TTG’s Perspective

This is where we help support the transaction: looking at culture and the team’s decision-making capacity.  We work before the deal closes to reduce the cultural and key-person risk that the buyer has priced in.  We run the integration as optimization, not triage, to help protect retention and the performance the earnout is dependent upon.  IBA brings the packagers and the process managers, we make the soft layer hold, before and after the ink dries, so the numbers it controls hold with it.  If you have a seller heading to market, one under LOI, or one recently closed with an earnout at risk, that’s when this is worth a look. The earlier the better, but it’s rarely too late.

Want to stress-test a specific deal? Reach out or pass this to the client who needs to read it.

Sources

• 44% of M&A leaders cite cultural fit / friction as a top reason integrations fail. McKinsey & Company, “The culture compass” (Jan. 2023 survey of ~1,100 M&A leaders). https://www.mckinsey.com/capabilities/m-and-a/our-insights/the-culture-compass-using-early-insights-to-guide-integration-planning
• 70 to 90% of completed deals fail to deliver intended value. Deloitte, “Culture in M&A: Managing culture change to enhance deal value.” https://www.deloitte.com/ch/en/services/consulting/perspectives/culture-in-m-and-a-managing-culture-change-to-enhance-deal-value.html
• 47% of key employees leave within one year; Human Capital Gap of 10 to 15% of purchase price. EY research, as cited by Gallup. https://www.gallup.com/workplace/267494/stop-losing-talent-merge-acquire.aspx
• Earnouts pay ~21 cents on the dollar; contested ≥28% of the time. SRS Acquiom, 2024 M&A Claims Insights Report / 2025 Deal Terms Study. https://www.srsacquiom.com/our-insights/ma-earnouts-overview/
• DOL recovered $259M+ in back wages for ~177,000 workers in FY2025. U.S. Department of Labor, Wage and Hour Division news release (Jan. 2026). https://www.dol.gov/newsroom/releases/whd/whd20260108

If you have questions relating to the content of this article or would like to learn more about what The Theodoros Group does for its clients, Melissa Davis would welcome the opportunity to answer them.  Ms. Davis can be reached at (760) 914-7031 and [email protected].

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, accounting, legal, and financial planning communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.