Culture is King, So Why Isn’t It Mentioned in the Purchase Agreement?

Practice Management Transactions

Elvis crushed a handful of grapes against the side of this huge 1956 Cadillac Eldorado and asked the paint shop to match the color (

Mercer Capital is headquartered in Memphis, where Elvis Presley lived most of his life.  It occurred to me recently that I’ve never written about Elvis’s passion for cars, a pretty huge oversight for this blog.  Elvis bought a lot of cars – estimates number his purchases in the hundreds – for himself, family, employees, friends, and occasionally strangers.  A friend of mine who owns a few auto dealerships now was a young car salesman at the local Lincoln/Mercury dealer in the 1970s when he got a call in the middle of the night to “come on down to the dealership…Elvis wants to look at cars.”  He and the other salesmen took scores of cars to Elvis’s home, Graceland. Elvis sat in a chair on the front porch while they drove the cars, one at a time, past him in the circular driveway.  Elvis would either say “yes” or wave them off. By sunrise, he had agreed to buy a dozen cars – mostly as gifts.

If you visit Graceland, you’ll get a strong sense of how the extravagant culture of Elvis Presley’s entertainment enterprise was built around him: dozens of cars, customized jet aircraft, strings of horses, collections of firearms, fried peanut butter and banana sandwiches, all night jam sessions in a Hawaiian-themed den with carpet on the ceiling, and a racquetball house with a running track on the roof.

Graceland is a perfect study in corporate culture at the extreme. On the Graceland tour, you’ll quickly understand that Elvis was a “package-deal”; you couldn’t get the same entertainer from a person who lived a life of moderation. While most RIA founders aren’t as “unique” as Elvis, investment management firms tend to be built around the peculiar interests and desires of their founders, and separating the firm from the founder is easier said than done.

Culture Is King

Culture is the most glaring omission of any purchase agreement. We may not have any clients who show up to work at their RIA in white jumpsuits, but we have some who wear board shorts and flip-flops to the office, and others who dress so formally we suspect they wear neckties with their pajamas.  Some keep rigid office hours and some are always someplace else.  Some like a team approach to investment management and others act strictly on their own instinct.  Some drive flashy sports cars and others prefer run-of-the-mill SUVs.  None of them wants to change just because they’re selling their firm, but what’s not written in the purchase agreement is the difficulty in maintaining cultural identity for a seller after the transaction.

Transitioning culture wouldn’t be such a big deal if founding members of RIAs could just walk away after the transaction.  As we all know, though, even when an asset manager transacts, there are relationships to hand off and successor managers to groom and earn-outs to earn – such that partners usually have to stick around for three to five years after selling.  As a consequence, founders have to undergo a cultural change at the firm they founded, which can be galling.

For folks who are considering offers for their investment management firm, we usually counsel them to remember a few things that aren’t outlined in the LOI:

  1. You’re not going to be the boss anymore. One seller was apoplectic when the bank that purchased his wealth management firm changed the color of his firm’s logo to match that of the bank. It’s going to happen.
  2. You’re going to have a boss. Sellers often seem surprised that there is a reporting structure of which they are a part, in spite of being assured that the buyer will give them “maximum autonomy.” Autonomy doesn’t mean you get your own island.
  3. Your employees are going to have a new boss. And they might like that boss more than they like you. You think that you want that for them, but it won’t do much for your ego.
  4. Your clients may question your commitment after the sale. If you start to enjoy your reduced responsibility and increased liquidity too much, your clients will assume you are “calling in rich” – and take their assets elsewhere.  Best to keep the overt transition low key until the earn-out period is complete.
  5. The same “founder’s syndrome” that helped you build the firm will now fuel your frustration. Founders are driven by senses of identity and autonomy that are completely undermined by selling. So when you get up from the closing table, head straight for the therapist’s couch.

Elvis Presley’s posthumous hit single, “A Little Less Conversation,” pleads for actions instead of words. On the contrary, we suggest that founders think about what makes their firm unique and what aspects of that uniqueness you are, and are not, willing to give up in a transaction. Then have a little more conversation with the buyer about their post-transaction expectations for your firm’s culture. If you can agree to how you’re going to work together before the deal closes, everyone will be more successful after the deal closes.

As always, feel free to reach out to us if you’d like to talk further.