What is HR Due Diligence and Why is it Crucial for M&A Success? resources due diligence is a critical but often overlooked part of the M&A process. As the name suggests, HR due diligence involves thoroughly evaluating the human capital and HR practices of a target company during mergers and acquisitions.

The goal is to identify risks, liabilities, and opportunities related to employees, company culture, policies, and compliance Done right, HR due diligence enables smooth integration and unlocks the full potential of human capital post-deal.

Here we’ll explore what exactly HR due diligence entails why it’s so important and how to conduct it effectively.

What is Included in HR Due Diligence?

HR due diligence encompasses a deep analysis of all things human resources at a target company Key aspects include

  • Employee contracts – Reviewing employment agreements to uncover obligations, liabilities, non-competes, etc.

  • Compensation and benefits – Assessing pay structures, incentives, health plans and identifying discrepancies.

  • Policies and handbooks – Evaluating HR policies and procedures for compliance, fairness and integration readiness.

  • Organizational charts – Mapping reporting structures, redundancies, and opportunities.

  • HR technology – Determining systems in use and requirements for integration.

  • Compliance audits – Ensuring adherence to labor laws and regulations.

  • Culture assessment – Gauging cultural fit and change management needs.

  • Key talent – Identifying critical staff and succession planning.

  • Litigation review -inspecting HR-related lawsuits or disputes.

The depth and focus of HR due diligence will vary based on the specifics of the deal. But covering these key areas provides a comprehensive picture of the workforce risks and dynamics at play.

Why is HR Due Diligence Critical for M&A Success?

While it’s common to zero in on the financials, operations and commercial aspects of a target, neglecting HR due diligence can sabotage deals in multiple ways:

  • Hidden liabilities – Employment contract issues, underpaid wages and benefit obligations can mean unforeseen costs.

  • Compliance risks – Violations of labor laws lead to lawsuits, damages and derailed deals.

  • Culture clash – Lack of cultural cohesion drives turnover, lost productivity and poor integration.

  • Loss of key staff – When critical talent jumps ship, business value walks out the door.

  • Benefits gaps – Inconsistent compensation breeds resentment and impacts retention.

  • Process breakdowns – Misaligned HR systems cause administrative headaches.

Thorough HR due diligence minimizes these pitfalls through proactive risk assessment and integration planning. It provides the human capital insights necessary to capture synergies and execute a smooth transition.

Best Practices for Conducting HR Due Diligence

Follow these tips to ensure your HR due diligence is comprehensive, efficient and positions integration for success:

  • Start early – Initiate HR diligence as soon as possible in the process to allow enough time for analysis and planning.

  • Involve key stakeholders – Legal, HR and business leaders should collaborate to cover all bases.

  • Utilize checklists – Maintain rigorous documentation to track progress and ensure consistency.

  • Ask probing questions – Dig deeper than surface level responses from the target company.

  • Review policies – Don’t just ask if policies exist, examine them firsthand.

  • Verify data – Spot check employee info accuracy via sampling.

  • Conduct site visits – Directly observe culture and operations.

  • Consider outsourced HR – Leverage third party expertise if needed.

  • Develop integration plans – Map post-merger org charts, systems transitions and communication plans.

Key Areas of Focus for HR Due Diligence

While every M&A deal requires tailored diligence, these aspects often benefit from extra scrutiny:

Employment Contracts

Dig into executive contracts, non-competes, IP clauses, severance terms, and change in control provisions that may impact the transaction or retention.

Compensation Consistency

Look for pay disparities across positions, levels, and demographics that could breed resentment post-merger.

Policy Alignment

Review parental leave, remote work, PTO, and other policies for gaps that need reconciliation after closing.

Compliance Auditing

Scrutinize classification of exempt vs non-exempt staff, overtime calculations, and contractors vs employees.

Cultural Integration

Assess unwritten norms, motivators, and management styles to determine cultural realignment needs.

Key Talent Retention

Identify critical staff at risk for turnover and proactively create retention plans.

HR Technology

Determine systems requiring integration like payroll, HRIS, and performance management.

Pitfalls to Avoid in HR Due Diligence

Steer clear of these common missteps that derail HR due diligence:

  • Conducting only surface level reviews or relying solely on questionnaires.

  • Failing to validate reported information against actual data, documentation and direct observation.

  • Not requesting enough documentation upfront leading to delays.

  • Neglecting to involve legal counsel and HR leaders from both sides.

  • Discounting remote employees or international talent with different laws.

  • Lacking post-merger integration plans for culture, systems and policies.

  • Failing to identify retention risks with critical staff or managers.

  • Not designating transition support like change management resources or outsourced HR.

HR Due Diligence Ensures Smooth Post-Merger Integration

While it takes time and focus, comprehensive HR due diligence sets the stage for integration success and unlocks the greatest people-related synergies from deals.

It provides actionable insights for retaining key talent, aligning cultures, reconciling policies, integrating systems and maintaining compliance through times of disruption and change.

In the high-risk world of M&A, overlooking HR due diligence can allow deal-breaking risks to persist beneath the surface. But tackling it head on positions you to maximize returns by capturing the full potential of human capital.

Want to Learn More?

If you found this overview on HR due diligence helpful, be sure to explore these additional resources:

By mastering HR due diligence, you can steer clear of people-related pitfalls and pave the way for integration excellence in your next deal.

what is hr due diligence

Learn about the benefits of performing this type of due diligence in mergers and acquisitions

It is a fact that much of the Target’s performance is linked to its people and the way the organization is designed to allow for employees to perform the way they do. Besides the standard analyses on legal and labor aspects, an HR due diligence approach offers more insights about the Target’s organization, current compensation and benefits, culture and HR practices.

The third article in this edition of the 5 minute reading series presents the key pillars of Deloittes approach in its HR due diligence methodology, which aims to minimize risks and provide important information to support during the negotiation phase. Read the full article to learn about the benefits of this type of due diligence in mergers and acquisitions.

Primeiro artigo da nova edição da 5 minute reading series apresenta o que é due diligence e os tipos que devem ser considerados em transações de fusões e aquisições.

Mergers and Acquisitions Due Diligence Explained

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