When conducting M&A, a number of factors are considered by the sell and buy-side, from the target company’s finances, to their technology and operational efficiencies. Too often, however, deal makers make the mistake of ignoring one of the most important types of due diligence, HR due diligence.
Involving human resources from the very start, and getting a clear understanding of the company’s culture and people, can make a world of difference. To get you on the front foot, we’re going to discuss the basics of HR and cultural due diligence, how long it takes and what is included in the investigation. We even provide a checklist so you can be totally ready, whether you’re buy-side or sell-side.
What is HR due diligence?
HR due diligence is where the target company’s HR processes and human capital are put under the microscope. The culture of the company, as well as the roles, capabilities and attitudes of its people are investigated. This not only helps to identify differences in decision-making, but can uncover points of friction and reduce any loss of talent after the deal.
During this particular due diligence process, there are several HR operational risks that are investigated. These include:
- Workplace relations (employee turnover, current or historic employee disputes, performance culture etc.)
- Organizational culture (leadership structures, company values etc.)
- Remuneration and benefits (leave and vacation policies, bonus plans, compensations)
- Employment agreements
- Training and development processes
- HR policies and procedures
The aim of this is to prevent some of the common pitfalls of M&A, such as:
- Loss of talent before and during the deal
- Decreases in productivity
- Misalignment of culture, processes and communication
- Internal conflict due to different decision-making style
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HR due diligence sell-side
In mergers and acquisitions, we generally think of the buyer performing due diligence. However, the company that is being acquired must also do their due diligence. Why? Because nearly half of deals fail due to issues surfaced during due diligence. If the sell-side can perform due diligence on their own company first, issues can be identified and rectified before any buyer gets involved.
The result for the buyer is a more streamlined, less frustrating deal. For the seller, it often equates to a higher value outcome.
HR due diligence buy-side
For the acquiring company, cultural due diligence is an important step on the road to peace of mind during an M&A deal. A thorough understanding of the target's capabilities, HR processes and culture is key.
It’s about identifying major risks, current or future, that could impact the business; for example, loss of talent after the deal or disagreements which stall the post-merger integration process. It’s also an opportunity to look out for capability gaps and to have a more holistic view of the target company.
How long does the HR due diligence process take?
1-2 months is about right for due diligence. This is generally enough time for the buyer to complete a thorough evaluation of the business, including the human capital aspects.
However, if the seller goes into the deal unprepared, the process can be extremely time-consuming and drag on. This is why always-on readiness is essential to a successful deal.
