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The importance of HR due diligence before an acquisition


Before purchasing another company, executives will conduct financial and legal due diligence. However, HR due diligence is often an afterthought or not considered at all.

As a result, mergers and acquisitions can fail when no or inadequate HR due diligence is performed. Some of the reasons have to do with the risks related to human resources practices, legal and compliance risks, talent retention issues, and culture clashes.

While it’s obviously important to know what your business is getting into from a financial and legal point of view, prioritizing HR due diligence is essential to increasing the likelihood of a successful merger or acquisition.

Key HR issues that are often overlooked during acquisitions

business person standing in board room looking at tablet

1. Employer obligations

The company that is being targeted for acquisition or merger may have made certain promises to the employees that are written, verbal, or implied.

The HR due diligence process will help identify what obligations may need to be honoured by the acquiring company, and the expected costs that may be associated with those obligations. These obligations may include employee contract terms, discrimination claims, bonus structures, and severance packages.

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2. Termination costs

It’s important to understand what makes up the workforce of the target company in making determinations on whether you will acquire all, some, or none of the existing target’s employees. Information around skill, experience, key roles, and critical external relationships of employees needs to be balanced by other considerations around employees age, title, length of employment, and other factors that can affect termination costs.

While there’s no obligation for the acquiring company to take on employees, it is important to understand the costs associated with terminations both at the time of acquisition and after.

business person talking to team

3. Not identifying and retaining key employees

With talent attraction and retention still top of mind for organizations of all types and sizes, it’s important for acquiring companies to identify top talent early in the due diligence process. Understanding employees that are critical to the business and its success will enable the acquiring company to make plans around retaining essential knowledge, skill, and relationships to ensure continuity of the business.

HR due diligence can help uncover key employees and reduce the risk of losing this knowledge and expertise.

group of three people talking

4. Culture

Bringing together two different companies may lead to a culture clash. For example, the company being acquired may have different practices and processes than yours and implementing significant changes may lead to pushback. That can result in low morale and productivity issues after the deal closes.

During the HR due diligence process, a trusted advisor can look at past engagement surveys or interview employees in supervisory positions to determine if there’s going to be a culture clash and what steps can be done to manage culture during an integration.

The bottom line

Acquiring a company is complicated and may result in additional risks. Conducting HR due diligence on a company your business is acquiring can help identify any problems that may arise after the deal is completed.

For companies planning to sell, going through the HR due diligence process ahead of a sale can also make your business more attractive and may lead to a higher value if any potential problems identified are resolved.

How we can help

Purchasing a company without conducting HR due diligence will often lead to failure. Our practitioners have helped many organizations identify risks that may cause trouble after the acquisition is completed. Contact us to find out how we can help.

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