During any acquisition, there are numerous pre-close considerations, from assessing the target company’s financial health to ensuring strategic alignment with the acquiring company. However, one crucial factor that deserves extra attention is the people—not just how they will be compensated and managed, but how they will integrate into their new company after the acquisition.
As you begin the HR and benefits due diligence process and dive into the target company’s HR policies, people, and workplace culture, keep these key considerations in mind:
1. Many SMB Owners Have Never Sold Before
According to BizBuySell, small business acquisitions are on the rise, a trend likely to continue into the future. Nearly 20% of surveyed business owners said they wanted to sell their business in 2025, and another 25% intend to sell sometime thereafter.
Despite the abundance of eager sellers in the market, not all will successfully sell their business. Exit Planning Institute research found that 70% of small businesses put on the market don’t sell. Those who do have a deal on the table may lack acquisition experience, which can make for a challenging HR due diligence process. Furthermore, many small and medium-sized businesses lack a fully developed HR function, making it difficult to gather the necessary information for a thorough review.
Employee census reports, I-9 work authorization records, job descriptions, and HR policies are just a few examples of documents SMBs may not have available. In some instances, they might be compiling this information for the first time, specifically for due diligence purposes. In this case, it’s critical to not just rely on the documentation the target company provides, but also ask questions about the information that may be missing, such as:
- Historical turnover rates
- Information about former employees and any exit interview feedback
- Past claims for unfair dismissal, harassment, and discrimination
2. Employee Misclassification is a Costly Compliance Risk
It’s not uncommon for companies to misclassify workers, sometimes unintentionally. For example, individuals may be classified as 1099 contractors when they should legally be classified as W-2 employees. Or, overtime-eligible employees might be classified as exempt from overtime. These misclassifications can prompt employee wage and hour claims, lawsuits, and US Department of Labor (DOL) penalties. In 2023 alone, the DOL collected $24 million in back wages for nearly 20,000 misclassified workers.
When you’ve got many other factors to consider during an acquisition, you don’t want even one employee misclassification to cost you time and money down the road. A trusted Professional Employer Organization (PEO) can provide the expertise to analyze every position in the target company, so any errors can be identified and corrected before closing. At Aspen HR, we perform comprehensive HR and benefits due diligence on your behalf. We review all employee classifications, job descriptions, and HR practices to ensure compliance with federal and state laws.
3. Benefits Represent a Key Opportunity for Cost Savings
Attracting and retaining the best talent is critical for all businesses, but SMBs can struggle to compete with larger companies if they can’t offer comparable benefits. Considering that 70% of employees would switch jobs for better benefits, finding cost-effective, quality benefits for employees is a critical differentiator for the newly combined workforce. Working with a PEO is crucial here, as we can negotiate more affordable healthcare premiums. As a result, it’s possible to offer all employees Fortune 500-level benefits at significantly lower rates than those typically available to smaller companies.
4. Company Culture Alignment is Key
While company culture can be difficult to measure, it remains a crucial factor in acquisitions. It strongly indicates how well employees will integrate into their new environment. During the HR due diligence process, examining the following documents will offer valuable insights into the target company’s workplace and culture:
- HR policies and the employee handbook
- Historical employee survey results
- Performance reviews and compensation records
- Organization charts
- Internal communications, e.g., intranet, announcements, etc.
Build a Strong Foundation for Acquisition Success
By asking the right questions during the HR due diligence process and reviewing documentation with an expert eye, you can ensure a well-executed acquisition that lays the groundwork for long-term success. For help identifying HR compliance gaps and improvement opportunities during your next HR due diligence, speak to a member of our team.
