As companies strive to expand, mergers and acquisitions can present exciting prospects, yet the journey can prove arduous and intricate. If the acquisition process does not include careful HR due diligence, serious repercussions can follow. Conducting a thorough assessment of a company’s human resources practices, policies, and procedures is crucial to identify potential risks or liabilities that may arise from a merger or acquisition.
Before embarking on a merger or acquisition, conducting HR due diligence is crucial, and in this article, we provide you with a checklist to help you navigate through the complexities.
The Importance of HR Due Diligence for Mergers & Acquisitions
HR due diligence is crucial in mergers and acquisitions. Some of the challenges that can arise, such as financial, legal, and even cultural issues, will reduce workplace morale and productivity if HR due diligence is not exercised. HR due diligence is so important because it helps acquirers get a better understanding of the company’s employment practices, liabilities, and culture.
This process helps in discovering HR-related liabilities and risks that may have an influence on the business’s financial performance after an acquisition takes place. For example, HR due diligence may reveal problems like a failure to comply with employment rules, inadequate HR policies and processes, employee conflicts, or potential legal challenges. These problems might cost the purchasing company a lot in terms of money and legal fees if they are not resolved before the purchase.
HR Due Diligence Checklist for Acquisitions
When you’re acquiring or merging with a new company, it helps to have an HR due diligence checklist that can help guide you through the process and make better decisions. With a checklist, you identify HR challenges and opportunities and resolve them before they occur.
Employee information: This involves gathering information on the total number of employees in the target company. It also involves analyzing job titles and understanding workforce diversity.
Reviewing employee information should also involve:
- Looking over employee contracts and agreements
- Evaluating compensation and benefits plans
- Taking a closer look at the employee turnover rate
- Analyzing performance metrics
Legal compliance: This involves a thorough review of the target company’s HR policies, practices, and procedures to ensure that they comply with relevant laws and regulations.
Some examples of what’s involved in legal compliance are:
- Examining the target company’s compliance with employment laws at national and international levels
- Reviewing past litigation, settlements, and disputes
- Ensuring full compliance with HR policies and procedures
- Looking over employee classifications
- Analyzing immigration compliance
Organizational structure: This involves examining the target company’s organizational structure to understand how the HR function is organized and how it fits within the overall organizational structure of the acquired company.
When reviewing the organizational structure, some things to consider are:
- Getting a better understanding of the target company’s reporting structure and hierarchy
- Carefully looking at the responsibilities of the HR team members
- Reviewing job descriptions and organizational charts
- Taking a closer look at HR leadership and management
Talent management: This involves assessing the target company’s approach to managing and developing talent to determine its strengths, weaknesses, and potential areas for improvement.
Some important factors to keep in mind with talent management are:
- Evaluating the target company’s recruitment strategies and hiring practices
- Checking over development and learning programs
- Identifying future successors to positions and reviewing skill gaps
- Reviewing the target company’s retention strategies
Company culture: This involves assessing the target company’s work environment, culture, and values to determine if they align with the acquiring company’s culture and values.
When analyzing company culture, look at:
- Beliefs and values of employees
- How engaged employees are in the workplace
- Policies aimed at encouraging diversity
- The work environment for employees
Potential HR Issues in Mergers and Acquisitions
Without appropriate HR due diligence, potentially damaging concerns may go unnoticed until the purchase is complete, leaving the acquiring company responsible for dealing with them
Integration problems: When two companies that have completely different sets of HR policies and practices merge, issues can creep up quickly. With HR due diligence, these problems are identified so that the companies can merge more seamlessly.
Legal complications: Legal fees, fines, and damages may be significant if potential liabilities in the HR department are not identified. For instance, the purchasing business can be held accountable for any employment law infractions made by the target company after the purchase.
Cultural discrepancies: Cultural differences between the two merged businesses may result in post-acquisition HR problems. This can involve misalignment of the company’s values, workplace practices, and communication procedures, which can result in disputes among workers and a decline in productivity.
Employee retention: When HR due diligence is deemphasized, employee retention may become a problem in the future. As an example, an acquiring company’s workers may be more inclined to leave, taking their knowledge and expertise with them, if the organization does not appropriately address employee concerns throughout the purchase.
Avoiding HR Challenges in Mergers & Acquisitions with HR Due Diligence
Mergers and acquisitions can bring numerous benefits, such as increased market share, improved efficiency, and expanded offerings. But without HR due diligence, there can be a wide range of challenges.
HR due diligence can help prevent problems from occurring before they even arise. For example, if there are compensation inequities between employees, this can lead to many conflicts after an acquisition takes place. Analyzing and resolving these issues early on can reduce the turnover associated with these disparities.
Legal issues can be another challenge. Addressing violations in labor law or safety regulations can help prevent legal problems.
Frequently Asked Questions about HR Due Diligence in Acquisitions
Q: What are the HR issues in mergers and acquisitions?
A: Cultural conflicts, talent retention issues, compensation and benefit differences, legal compliance issues, and communication difficulties are just a few of the HR problems that can arise during mergers and acquisitions.
Q: What is a major HR reason for the failure of many mergers and acquisitions?
A: One of the main HR reasons for the failure of many mergers and acquisitions is the lack of attention to HR throughout the entire due diligence process and integration phase.
Q: What is HR’s role in due diligence?
A: HR’s role in due diligence is:
- Examine the target company’s HR practices/policies
- Figure out what HR issues are present
- Develop a strategy to address the issues
Key Takeaways on HR Due Diligence Acquisition
HR due diligence is a crucial process in all mergers and acquisitions. It can identify HR issues before they start, reduce risk, and ensure a better integration process. Companies can lower their chances of legal complications, retain talent, and secure a more harmonious work environment for post-acquisition success.
If you want to learn more about how Aspen HR’s high-touch, white-glove HR services can help your organization navigate the complexities of HR due diligence in mergers and acquisitions, contact us today.
