Entrepreneurship through acquisition (ETA) is gaining momentum among investors and operators looking to grow by buying small to mid-sized businesses. But while financials, legal structure, and market position often dominate the diligence process, the people side of the business is where deals can unravel or thrive.
According to Bain & Company research, poor due diligence is the main reason deals fail, with almost 60% of surveyed executives in agreement. Of course, financial and legal reviews are standard, but HR due diligence is also essential for making sure your deal succeeds. Bringing in a PEO with experience in acquisitions helps you identify any people issues early and build trust with your new team from day one.
Key HR Lessons for Entrepreneurs Pursuing Acquisitions
In an acquisition, getting a clear picture of the talent you’re inheriting is essential to making the deal work. Aspen HR’s VP, Katherine Burrow, recently shared practical insights on this topic in a panel discussion at the 3rd Annual Texas ETA Conference and emphasized why HR due diligence should be a priority in every ETA deal. Some key takeaways:
1. Build a Solid Due Diligence Team
Even before signing a letter of intent, make sure your full due diligence team is in place. Legal, financial, tax, insurance, and HR experts should all be involved. Additionally, you can coordinate data requests and keep everyone aligned by holding a diligence kickoff call with the team early in the process.
2. Look for Culture and Leadership Warning Signs
Cultural issues in a business can sometimes be hard to identify, especially if the seller limits your access to employees. However, a thorough HR due diligence process can help you uncover and address culture and leadership issues before close. Examples include:
- High turnover: Frequent employee exits could be the result of leadership problems or a hostile work environment.
- Overreliance on key individuals: Heavy dependence on a few people, especially the owner and department heads, can make it harder to run the business smoothly.
- Employment claims: Complaints and legal claims involving harassment, discrimination, or pay can signal deeper cultural issues within a business.
3. Run an Error-free First Payroll
The first payroll after closing is a crucial moment for building trust with your new team. If paychecks are late, inaccurate, or confusing to employees, you risk losing credibility. Instead, you can partner with a PEO like Aspen HR to ensure a smooth payroll transition and show employees you’re serious about their overall experience at work.
4. Connect with Your People Early
Once the deal closes, connecting with employees should be a top priority, and transparent, consistent communication is an important first step. It’s equally important to understand what’s working and what needs improvement. A simple way to invite honest feedback is by asking employees, “If you had a magic wand, what would you change?”
The Aspen HR Approach to HR Due Diligence for ETA Buyers
Aspen HR helps you understand the full scope of what you’re buying. Our HR due diligence services go beyond surface-level checklists; they uncover hidden risks and opportunities that impact the long-term success of your business. They include:
- Payroll and Benefits Transition: We ensure accuracy and continuity in payroll and benefits administration, helping you keep employees engaged and committed.
- Compliance Support: We assess HR policies, wage and hour compliance, and job classification issues so you can limit legal exposure and avoid noncompliance penalties. We’re also the only PEO with a full-time employment attorney on our team.
- Culture Assessment: We help you understand employee engagement, turnover trends, and leadership dynamics in the target business.
- Post-Close HR Strategy: We support employee onboarding and ongoing HR operations to help you drive performance and retention.
HR Due Diligence Is Your Competitive Advantage
The people you inherit in an acquisition are the engine of your future growth, and understanding their needs and potential is absolutely essential. Aspen HR is here to help you get it right. We bring our deep expertise in acquisition HR strategy, due diligence, and day-to-day HR operations, so you have a smooth transition through closing and beyond.
Contact us today to learn how we can support your business and set you up for long-term success.