Due Diligence: It’s Not Just About Liabilities Anymore!


(Fourth in a series of posts about doing HR M&A right. The previous one is Designing Your HR Model for Integration Success.)

In our previous article on How to Avoid Being the Next M&A Horror Story, we noted the current reality of increasingly shorter due diligence timelines for M&A transactions. We also reviewed the impact of culture on the success or failure of acquisition deals. In this article, we will address the potential challenges and opportunities for improvement during the due diligence process. This includes how to begin evaluating the target company’s culture, even during the earliest stages of due diligence.

Due Diligence is typically viewed from a financial perspective as an opportunity to identify the potential risks to projects, the financial business case and the purchase price – especially those that could ultimately derail a deal. We would encourage you to see due diligence as more than a mission to identify liabilities and risks: it is an opportunity to begin decoding the culture and norms of the Target company. We recognize that it is important to get the financials right, but if you screw up the people transition, your deal will ultimately fail. For the past few decades, people issues during change are the oft-cited reason for deal failure in reports and surveys.

From the outset, it is critical to understand the structure and timing for the due diligence process that has been agreed between the two companies. The answers to these questions will inform your due diligence process priorities:

  • How many rounds of due diligence will be offered?
  • What should be addressed at each stage?
  • What is the level of preparation for the due diligence task on both sides?
  • Is this a competitive situation where one or more bidders are also posing questions?

Overall, the best advice for due diligence we can offer is to pace yourself and your questions posed to the target company. In our experience, inexperienced acquirers throw lists with hundreds of questions over to the target, frequently expecting a turn-around in a matter of weeks or even days. This happens often within HR, due to the fact that…

  1. There are so many different functions under the HR umbrella that may or may not be coordinating their questions;
  2. People attached to a deal carry the most risk and the most cost;
  3. The HR team may be very inexperienced in deals; and
  4. Within HR, there’s an assumption that we can prevent every risk by asking every question.

It is important for the due diligence team and the HR function to remember that the target company is in the midst of ongoing daily operations and they may have only disclosed the potential deal to a limited number of internal resources who may or may not have functional HR knowledge. And they may not have highly organized systems with reliable information or a simplified company structure, so it may not even be feasible for them to respond to endless questions. If you add in the complexity of multiple countries or regions, the workload becomes extremely labor intensive and sometimes impossible.

We recommend prioritizing your questions by those that have direct financial impact, represent risk to the project/timelines, and involve the people aspects of a deal.

Based on our past practice, we have designed an abbreviated due diligence list, especially within HR, that identifies the top 10 to 12 questions: executive contracts, severance, labor, benefit costs, pension/retirement/retiree benefits, compensation packages and performance management, legal/employee relations, HR vendor contracts, country specific requirements and culture. The remaining, more detailed questions can be posed once the initial phase of due diligence has passed.

You have a great opportunity during due diligence as you exchange information and meet with counterparts of the target company. During this process, you can begin to build relationships, set the stage for integration and examine the culture of the target company. You can learn a lot about the culture in the target company by noticing how leaders interact with and address each other; and how the organization is structured. It also allows you to identify key talent. Cultural differences will start to become apparent, and you will better understand their treatment, engagement and retention of employees.

Other Best Practices

  • Engaging target contacts, establishing strong working relationships and clarifying the internal organizational structure and alignment, within and between the two organizations
  • Initiating and socializing integration, communication and change plans early 
  • Clarifying cross-functional accountabilities 
  • Assessing and planning for retention of talent from the start

In summary, please remember not to flood the Target with questions. Keep your focus within each function limited to the top 10 to 12 risks with a requested opportunity to dive deeper at a later stage of due diligence. Also note that some questions are best answered through interaction and observation, especially when it comes to culture!


We'll post the next in the Getting HR M&A Right series soon. Don't miss your chance to see Ginger present at The Art of M&A for HR Leaders at the Hyatt Regency Grand Cypress in sunny Orlando this January!