HR Due Diligence
What is HR due diligence?
In the sales process, it is common to conduct a risk assessment known as due diligence. This involves carefully analyzing a company’s legal, tax, and financial circumstances, among other factors, to identify potential risks and financial obligations. Such an assessment is necessary. However, HR-related issues are often not a priority, with only 44% of companies reporting that they incorporate HR risks into financial models for the sale. When conducting HR due diligence, however, there are several issues that, if overlooked, can lead to significant financial risks for the potential buyer. It is therefore advisable to take these issues into account during the due diligence process.
What are typical HR risks in the due diligence process?
Risks can often be identified that, on the one hand, have immediate financial implications for the company if they are not properly mitigated. One example is unfunded or underfunded pension obligations. If these are not uncovered during the sale process, the potential buyer may face substantial payments. On the other hand, there are also risks that cannot be directly quantified in financial terms but still impact the company’s performance. One example is poor employee communication, which can lead many high-potential employees to look for new jobs, thereby causing indirect financial damage (e.g., through loss of skills, costs associated with replacing staff, and negative effects on team performance).
What topics does an HR due diligence typically cover?
Generally speaking, there is a very broad spectrum of potential topics in an HR due diligence process. These topics are selected based on the acquisition strategy and are weighted or prioritized to varying degrees. For small and medium-sized businesses, topics such as pensions and long-term liabilities, compensation and any special agreements, executives and succession planning, retention of key positions, culture and engagement, as well as talent acquisition are certainly particularly relevant. Depending on whether there is an employee representative body or different countries are involved, additional topics may be added. Increasingly, the topic of equality and diversity is also being analyzed. In general, it is advisable to involve HR early in a deal and to derive appropriate recommendations for action based on the findings.