With cultural and people-related issues frequently cited as one of the primary reasons transactions fail to achieve their potential value, HR due diligence has morphed from being on the periphery of the due diligence process to being a fundamental consideration of any deal.

Amid a surge in Q3 private equity investment, ICAEW’s Corporate Finance Faculty, working with Deloitte, has produced guidance for those involved in deals to better assess the people-related make-or-break factors that form part of a transaction.

The HR due diligence guideline, due to be launched on 10 December at Chartered Accountants’ Hall, follows the publication of similar guidance from ICAEW’s Corporate Finance Faculty on areas including commercial due diligence and financial due diligence.

Organisational culture and fit

David Petrie, ICAEW’s Head of Corporate Finance, says people-related matters such as pension liabilities have long been a major consideration in deals, particularly those involving large people-based businesses. “It is obviously essential to understand the material items on the balance sheet at completion. But equally, or possibly more important, is the cultural impact of reshaping an organisation and its likely impact on morale and employee retention.”

Louise Hunter, Head of HR Due Diligence at Deloitte and one of the authors of the guideline, explains: “If you're separating a business, are you going to change your benefit schemes? Or if you’re thinking about integrating two businesses in the future, how much might you harmonise and what’s the impact on costs? It’s about understanding how big-ticket items like share option schemes or pension schemes would be impacted and how to factor those into your due diligence.”

A good HR due diligence exercise goes beneath the surface of staff turnover and retention to look at the organisational culture and fit. Petrie says: “If the strategic rationale behind the transaction is to consolidate two businesses, it’s also important to understand whether this is the right team to deliver on the financial projections that underpin the basis of the value in the business. HR due diligence gives new owners of a business the ability to understand where its people-based competitive advantage comes from.”

And yet, Hunter believes the value impact of HR due diligence on a transaction can sometimes be misunderstood. “People may think it's less tangible, but there is an analytical, numbers-driven way to look at HR issues. People are increasingly realising that they need to pay more attention to some of these levers that perhaps have been a little bit taken for granted in the past.”

Robust data

The guideline is written for anyone involved in transactions including investors or businesses commissioning due diligence, advisers carrying out the due diligence, or a company that might be the subject of due diligence, looking to prepare themselves for the sorts of questions that might crop up during the HR due diligence process.

Hunter says robust employee population data forms the basis of much HR due diligence. “It's surprising how complicated that question can be when you start thinking about different types of workers including contractors, and different geographic locations.”

For those less familiar with the intricacies of HR due diligence, Hunter’s advice is to use the guideline as a framework of the kinds of questions that should be covered. “The guideline includes sections on how you might think about different industries or locations, or the top questions for different types of transactions, so it's useful for upskilling but also as a reference document to dip into.”