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Most sales of family-owned businesses fail early on due to a lack of agreement on the purchase price, because, for example, the buyer is unwilling to pay for the “passion factor.” However, once an agreement has been reached on this point, other—non-monetary—wishes of the selling family are easier to fulfill, such as retaining the company name or providing temporary protection against termination for employees. No less common, but more difficult to implement, is the desire to ensure that the company’s unique culture is not lost during post-merger integration—for example, because the company is to be absorbed into the acquiring group or because it is being sold to a financial investor who views corporate culture solely as a cost factor. Against this backdrop, how can one address the desire to preserve corporate culture?
Corporate Cultures and Their Characteristics
By “corporate culture,” we mean the totality of collective behavioral patterns within a company that influence its long-term success. These patterns play a central role in reputation, recruiting, marketing, performance, compliance, and the ability to adapt to change (e.g., in ESG, AI, etc.). The former are characterized in particular by a values-based approach, trust, loyalty, a sense of responsibility, transparent communication, and employee-centricity; the latter tend to be marked by strict hierarchies, informal power structures, unclear role definitions, micromanagement, and stagnation due to a fear of change. While a “good” corporate culture has a positive impact on these areas, a poor corporate culture has detrimental effects on them.
Safeguarding Corporate Culture
The starting point for safeguarding corporate culture is its recognition as an intangible asset. To do this, it must be operationalized—that is, made tangible. Without defining and specifying its concrete content and characteristics, the parties cannot know for certain, in cases of doubt, which measures are beneficial or detrimental to it.
Once a company’s culture has been defined, it is initially up to the seller to clearly signal from the outset that special importance will be placed on maintaining it even after the transaction is completed. However, this message will only get through if the selected buyer is receptive to this issue: a strategic investor—perhaps even another family-owned business—will be more open to discussion here than a financial investor with specific return expectations from its investors and an exit timeline of five to seven years. To ensure a shared understanding, it makes sense to include a commitment regarding the preservation and promotion of the (defined) corporate culture in the purchase agreement. This can be done, on the one hand, in the preamble—which serves as a guide to interpretation and influences the entire agreement—and, on the other hand, as so-called “post-closing covenants” in the agreement itself, that is, in the form of a direct obligation on the part of the buyer.
However, since it will be difficult—depending on the specificity of the cultural definition—to prove a breach of this obligation, let alone any resulting damage, it makes sense to implement additional safeguards. These may generally include the introduction of approval requirements for measures that could have a direct impact on corporate culture. However, since the seller, as a shareholder, will in all likelihood have completely withdrawn from the company following the transaction, the approval requirement—if it is not to be left entirely to the buyer’s discretion—must be granted by an independent advisory board, which would need to be established and whose composition the seller, or at least the employees, should have a decisive influence over. If the company is a stock corporation in which the executive board manages the company independently of the shareholders, corresponding approval requirements must be enshrined in the executive board’s rules of procedure. In particular, in the event of clearly defined violations of the corporate culture, contractual penalties and lump-sum damages obligations on the part of the buyer may be agreed upon as supplementary measures. In the worst-case scenario, the seller may also secure a right of retransfer (call option) to repurchase the shares (if applicable, at the original sale price).
As with all contractual agreements, it is important to ensure that these provisions are enforceable only under the law of obligations between the contracting parties and must therefore be bindingly transferred by the seller to any third party in the event of a resale before the shares may be transferred.
Conclusion
Corporate culture can be regarded as an intangible asset and safeguarded when a family business is sold. The first and most difficult step in this process is to define and determine the content of the corporate culture. Furthermore, not everything can be legally safeguarded. Rather, a combination of legal and informal measures is needed to, on the one hand, maintain the trust of the selling family and, on the other hand, avoid unnecessarily complicating the integration process for the buyer.
