The human side of due diligence

As featured on BusinessMirror: The human side of due diligence

Humans play a vital role in transforming organizations. Shifting demographics and changing social expectations from today’s workers are reshaping the corporate landscape. To attract, engage and retain employees, companies are introducing innovative employment policies and work practices. Organizations, too, are demanding their people work in new ways to leverage artificial intelligence (AI) and other automation technologies.

All of this is introducing new dynamics for dealmakers. As the rate and pace of transformations differ across geographies, within industries and between companies, investors will need to broaden their scope of due diligence to human resources.

The human factor is critical to a deal’s success. Leaders and employees bring the skills, knowledge and relationships that are essential to maintaining business operations, fostering innovation and driving growth. Depending on the deal thesis, these can be the very things some buyers are looking to gain.

Understanding a business’ workforce and structures — the policies, programs, contracts, cultures, leadership styles — can offer dealmakers important insights about a target investment. It can also help investors more deeply understand a business: its scalability potential, its reputation as an employer and its ability to innovate. Diving deeper into a business’ human resources can also offer additional insights into the potential liabilities or incompatibilities that could risk value potential, increase acquisition costs, lead to the loss of key talent, or disrupt business continuity.

This level of analysis goes beyond the review of employee contracts and benefits. As important as these are, dealmakers need to perform a fuller assessment of a company’s workforce composition, its people and culture. Headcount, tenure, attrition rates and capability gaps can shed light on the reality of a target’s growth plan.

Considering a target’s leadership and key talent can help investors identify who drives and runs the business, who holds the critical relationships and who makes key decisions. With this information, dealmakers can proactively develop strategies to drive retention and engagement. It can also help ensure business leaders are driving the employee journey.

HR due diligence is a critical part of the overall assessment of a business’ financial performance. To understand a deal's key risks and post-deal considerations, there are three areas of human resources, that when analyzed during the due diligence process, can help dealmakers enhance value, mitigate risks, identify opportunities and enhance long-term value across the deal life cycle.

Change in control triggers, distributions and other post-close requirements for key management and the broad-based employee population. This includes assessing any transaction-related payments that may be material to the deal that could impact value or create an attrition risk of key leaders and talent.

The ability to understand the current market and existing organizational structure provides perspectives on the ability to attract and retain talent. This includes market benchmarks in terms of compensation, culture, brand reputation and employee value proposition. It also requires the buyer to consider strategies that will likely have employees saying, “Even without this deal I’d have chosen to work for this organization.”

Analyze employee value propositions and other workforce strategies that may impact deal valuations. These could include headcount growth, culture-based programs, compensation and benefits packages, equity-based and variable pay that drives retention, and longer-term HR operation structures that may create synergy opportunities, such as migrating to automated or AI systems, or benefits providers. 

Analyze employee value propositions and other workforce strategies that may impact deal valuations. These could include headcount growth, culture-based programs, compensation and benefits packages, equity-based and variable pay that drives retention, and longer-term HR operation structures that may create synergy opportunities, such as migrating to automated or AI systems, or benefits providers. 

Before buying or selling a business, dealmakers will want a clear picture of the value of the business. To do so, they’ll need to widen the aperture of their analysis to include the people side of the business. From workforce composition to HR operations, people policies and programs as well as leadership and rewards packages — deep investigation into each of these areas can help buyers project costs upon deal close, while understanding the potential drivers that will grow and create value for the business in the future. For sellers, more comprehensive due diligence can help gain a truer picture of the business’ value to set an optimal price for the deal.

Assessing a business’ human side can help enhance due diligence for any deal. It is especially relevant to deals where the acquisition of talent and knowledge is at its core, and in situations that will bring together business from different geographies or with different organizational cultures.

Analyzing the full scope of people risks and opportunities in a deal requires cutting edge expertise in human resources, rewards and compensation and cultural integration, all the while bringing a deeper understanding of the deal cycle. It also requires access to specialists in pensions, labor law as well a deep sector knowledge to help convert any findings into meaningful insights within weeks, not months, so dealmakers can make decisions with conviction at deal speed.