Skip to main content
main content, press tab to continue

The critical role of HR experts in M&A due diligence

December 21, 2023

Involving HR professionals early in M&A due diligence can help deals close more quickly and increase the chances of a successful transaction.

Finance, legal, tax and other experts are typically involved in the due diligence phase of M&A transactions. Such teams’ knowledge of HR issues is often limited, resulting in only superficial exploration of people issues. Yet even minor people concerns can delay or derail deals entirely. Involving HR experts in early in due diligence can help avoid such pitfalls and increase the chances of a successful transaction.

Commonly ignored topics in HR due diligence

While HR issues with more easily quantifiable costs (e.g., executive compensation, cost of benefit plans, anticipated severance) are usually covered in HR due diligence reports, many of the more challenging costs to measure are left unexamined. Examples of HR topics frequently neglected during due diligence include:

Employee headcount by location: High-level due diligence reports often list total employee headcount, yet many omit employee headcount by location. Understanding headcount in each location enables buyers to consider critical factors such as relevant country- or region-specific laws and regulations, the potential for organized labor presence, and whether location-specific headcount thresholds might necessitate certain employment-related actions or payouts from the buyer. Some of those actions, such as works council notification and consultation, might require several weeks before deals are allowed to close, resulting in deal delays.

HR operating model: Integrating an acquired business’ HR department and its processes can be challenging and costly. Understanding the extent to which the target company’s HR model is centralized or decentralized and how that might contrast with the buyer company’s HR model is complex and can require significant resources and change management.

HR systems: HR technology integration is one of the most complicated aspects of a transaction, and it can be one of the most expensive to execute. Inventorying the full suite of HR systems used in each in-scope country is imperative for understanding the resources required to execute those changes and how that should be factored into deal costs and integration plans.

Talent management: If one or more of the target company’s talent management processes are misaligned or non-existent, rationalizing or developing those processes will require substantial time and resources and extensive change management. For example, suppose the buyer’s performance management processes are well-refined and the seller has few formal ones. The target’s people managers will need intensive training to effectively coach and manage the performance of their direct reports using the buyer’s desired method.

How detailed HR due diligence accelerates M&A integration

While HR due diligence is sometimes considered a mere checklist for assessing compliance and risk, it should also be viewed as a catalyst for rapid integration planning and execution. Companies that rely on minimal HR due diligence are ill-equipped to anticipate integration needs before Day 1, and any plans they’ve developed will likely be too high-level or arbitrary to be effective.

If companies neglect to request all relevant data during due diligence, they'll still need to receive information during integration planning and execution, as all plans and timelines must be specifically tailored based on review of the target’s data. Requesting, acquiring, and meticulously reviewing information from target companies can consume valuable weeks, precluding a buyer from initiating proper integration planning and execution until that process is complete.

If HR due diligence is done well, integration plans and timelines will be well-informed before close, enabling buyers to begin executing near-term plans immediately and further refine the integration approach for more long-term initiatives.

The takeaway

Lacking thorough, all-encompassing HR due diligence led by subject matter experts, companies involved in M&A expose themselves to avoidable financial setbacks, transaction delays and unsuccessful deals. It is of utmost importance for organizations to either cultivate internal expertise in HR M&A or engage HR M&A specialists to undertake comprehensive due diligence. Moreover, when intricate HR due diligence is accomplished before integration planning, companies significantly enhance their prospects of achieving timely deal closures, adhering to integration schedules and realizing the intended deal objectives.

Related content tags, list of links Article
Contact us