Blog: The Critical Role of Cultural Covenants in Business Acquisitions
Blog: The Critical Role of Cultural Covenants in Business Acquisitions
Introduction
At Cojourn, we believe acquiring a good business is far more than a financial transaction. Successful acquisitions require preserving the spirit and culture that makes a business work. In this blog, we will explore the concept of cultural covenants and the unique role they play in Cojourn's transactions. These covenants represent the heart of how Cojourn ensures the legacy and values established by business founders continue to thrive post-acquisition.
Introduction to Cojourn
Introduction to Cojourn
Cojourn is a values-driven holding company investing in enduring family-owned businesses. We partner with business owners to provide a superior exit process tailored to respect the legacy and ensure the continued success of the company post-sale. One distinctive in our approach is including cultural covenants into our purchase agreements. These unique covenants demonstrate our commitment to maintaining and nurturing the organizational culture that defines each business.
What is Organizational Culture?
Organizational culture can be likened to a garden. Just as a garden needs careful planning, nurturing, and attention to thrive, so does a company’s culture. In a garden, visible plants and flowers represent the behaviors and practices we see on the surface. However, the roots, soil quality, and unseen caretaking efforts that sustain the garden symbolize the underlying beliefs, mindsets, and values that shape the environment. While the visible aspects of culture are important, it’s the hidden, foundational elements that truly sustain and nourish the organization.
Why Does Culture Matter?
In most industries the products offered by competing businesses do not differ dramatically, but high-performing organizations distinguish themselves in how and why they create and deliver their product. Organizational culture plays a critical role in this differentiation. According to McKinsey's research, organizations with top-quartile cultures, as measured by the McKinsey Organizational Health Index, post returns to shareholders that are 60% higher than median companies and 200% higher than those in the bottom quartile. (1) Professor James Heskett of Harvard Business School, in his book "Win from Within: Build Organizational Culture for Competitive Advantage," argues that an effective organizational culture provides businesses with a significant competitive edge. Higher employee and customer engagement and loyalty translate into greater growth and profits over time. (2)
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(1)
(2)
What are Cultural Covenants?
The term "covenant" originates from the French "covenir," meaning "to agree or meet," and from the Latin "convenire," meaning "to come together." In historical contexts, covenants were agreements to establish the basis of relationships, conditions, promises, and consequences. For our purposes, cultural covenants are essential and defining practices, traditions, and values established by a business founder that an acquirer commits to uphold post-acquisition. This commitment maintains the legacy and values established by the founder, ensuring continuity of the organizational culture. The historical and almost reverential significance of covenants underscores our dedication to stewarding the legacies of great founders and businesses. Importantly, cultural covenants often include financial and other penalties if they are not upheld, underscoring their critical role in our acquisition process.
Specific Examples of Cultural Covenants
Cultural covenants aren’t just a theory for us; they are put into practice. Here are some specific Cultural Covenant examples from our successful acquisition of OilStop. Note that each of these had meaningful financial penalties for Cojourn if we did not meet them during the defined period.
Maintain the Business Name and Mission Statement: The commitment to preserving the name "OilStop" and its mission statement underscores our dedication to maintaining the identity and purpose that the founder established, which is central to the company's reputation and customer trust.
Maintain Weekly Leadership Development Classes for All Employees: By continuing these classes, we ensure that the culture of continuous learning and leadership growth, which is crucial to the company’s success, remains intact and thrives.
Commit to Allowing Corporate Office to be Used for Voluntary Weekly Staff Bible Study Before Operating Hours: This covenant respects the founder’s values and provides employees with a space to engage in shared spiritual and community activities, reinforcing a sense of belonging and purpose.
Buyer and Seller to Meet in Person at Least One Time Per Month to Discuss Business Direction and Pray for Company and Its Employees: This covenant ensures ongoing alignment with the founder’s vision and values, providing a platform for continuous dialogue and spiritual support, which is integral to the founders view of a thriving culture.
Benefits
Cultural Covenants offer a series of powerful benefits for both buyer and seller in a business transition. Representative benefits are outlined below.
For the Seller
Preservation of Legacy: Sellers can ensure the unique identity, values, and traditions they’ve built over the years are preserved, providing peace of mind that their life's work will continue to thrive in a manner to make their family proud.
Employee Retention and Morale: The team is the most critical component of any successful business. Emphasizing and preserving culture will make employees feel secure and valued, reducing turnover and maintaining morale throughout the ownership transition.
Customer Loyalty: Customers often have strong attachments to the cultural aspects of a business. Preserving these elements will help retain customer loyalty and trust, which is essential for continued business performance.
Smooth Transition: Cultural covenants provide a foundation of trust, acting as a natural shock absorber to help both parties overcome the inevitable challenges of getting a deal done and facilitating a smooth transition.
Benefits for the Buyer
Employee Engagement and Productivity: Continuity in cultural practices helps in maintaining high levels of employee engagement and productivity, as staff continue to operate within a familiar and valued environment.
Operational Stability: By committing to cultural covenants, the buyer can ensure a more stable and predictable operating environment, reducing the risks associated with major cultural shifts that can accompany a transition.
Competitive Advantage: Businesses with strong, unique cultures often perform better and have a distinct competitive advantage. Preserving these cultural elements can enhance the company’s market differentiation.
Smoother Integration: Cultural continuity can lead to a smoother integration process, with fewer conflicts and misunderstandings, enabling quicker realization of synergies and business goals.
Summary
These benefits highlight the importance of cultural covenants in ensuring that both the seller's and buyer's interests are aligned. By facilitating a successful acquisition and preserving the unique aspects that made the business valuable and attractive to Cojourn in the first place, cultural covenants play a critical role in the long-term success of the businesses we invest in. Cojourn is committed to honoring and extending the legacies of business owners through our long-term approach to acquiring and stewarding companies toward enduring and impactful success.