Measuring business compatibility through cultural due diligence

February 17, 2023

Cultural due diligence is an important element of evaluating business and financial transactions, particularly in the cross-border context. It seeks to understand the history, culture, and customs of a particular region or country before investing capital, and can help inform the remaining steps of a business transaction. In essence, it involves researching the behavioral norms, language, politics, religious beliefs, traditions, values and expectations common in the region and looks at how they apply to the target company in practice, helping to avoid any potential risks that may come from cultural differences or misinterpretations.

In practice, cultural due diligence can involve examining a wide range of data, such as the cultural and political landscape, government regulations and policies, existing customs and norms, media coverage, customer preferences and more. By understanding these dynamics and applying them to potential investments or transactions, companies are able to make informed decisions that suit their needs. In emerging and frontier markets, due diligence of this kind is particularly important due to the greater cultural complexities at play. Understanding the current landscape and trends in these regions can help guide decision making, while also helping to protect from legal and reputational risks, as well as financial losses.

What elements are most important to consider in cultural due diligence? First off, an examination of the organization's internal culture, including meeting practices, communication habits, and decision-making processes. Additionally, due diligence should include an assessment of the regional and national culture dynamics, such as language barriers, cultural customs and norms, economic climate, regional alliances and the overall political landscape. The exercise can also include the effects of cultural differences on customer preferences and relationships with partners.

The cultural due diligence can also inform the remaining steps of the transaction, and the contemplated business partnership. Cultural elements can not only affect negotiations but also how investments are managed in the long-term. For example, many countries have restrictions on the types of investments that can be made due to religious or cultural beliefs, or due to existing laws. Therefore, due diligence of each party’s overall objective and philosophy in participating is also critical.

Cultural due diligence also helps to identify potential areas of conflict and generates strategies for avoiding them. This is important for any business or financial transaction in order to ensure it runs smoothly and efficiently without any disruptions due to cultural misunderstandings. By understanding history, customs and traditions, businesses and investors can make informed decisions about their transactions with confidence.

CPM