The quality of a company or a business operation is primarily determined by the people who are active there. Therefore, it is particularly important for prospective buyers to get to know the management team and the employees in the course of a due diligence process. The quality of your management team and the operational processes has a significant influence on the fungibility of your company or business operation and on the sales proceeds.
A personnel due diligence process reveals the personnel quality of companies, but also makes weak points visible.
Prospective buyers want to find out how well the relevant skills are developed in the workforce and what potential (in a positive sense) exists. They are also interested in the quality of cooperation along the business processes and their optimization. They are also interested in staff turnover and the retention of key personnel. Very important for prospective buyers is the extent to which business operations depend on the shareholders selling the business. Two criteria in particular are relevant here: The personal commitment of key personnel (“walking assets”) to the previous shareholders and the dependence of the business itself on the previous shareholders. Both aspects are particularly critical and worthy of investigation in the case of owner-managed companies.
Independence from the previous shareholders is reflected in the quality of the management team. Accordingly, prospective buyers will question the decision-making powers of the management team. But they will also want to understand the way in which decisions are reached.
Prospective buyers will try to hear from their discussions with managers what the managers expect of “their” shareholders. This is a matter of cultural fit.
Prospective buyers can already recognize from the organization chart of a company what is particularly important for management and where there may be “blind spots”. Some necessary functions are not reflected in organizational charts or are not reflected at an appropriate hierarchical level. Often, these are coordination and optimization functions and functions that are intended to integrate operational activities into market activities. This is where prospective buyers will want to take a closer look. But the selected organizational form also allows conclusions to be drawn about the management culture.
In the course of personnel due diligence and legal due diligence, collective bargaining agreements, works agreements and the employment contracts of managers and employees are also examined. On the surface, prospective buyers can see whether the company pays what is customary in the industry and whether the agreed periods of notice and severance entitlements for key personnel are appropriate. However, they can also draw conclusions about the management culture in the company from the wording in the contracts and from the topics that are regulated in company agreements.
Example: There are companies with employment contracts that, apart from the agreed salary and vacation days, only specify duties for employees. The attitude of the both the management and the staff manifest itself accordingly.
Labor law disputes are also uncovered during personnel due diligence. Not only labor law proceedings, but also correspondence between the HR department and employees can provide information about future severance risks. Moreover, the history of labor law disputes is an indicator of the management culture and the working atmosphere in the company. The level of sickness among the workforce also allows conclusions to be drawn about the management culture. For this reason, prospective buyers will also take a detailed look at the development of the sickness rate. Leadership qualities can hardly be measured directly, but are indirectly reflected in innovative strength, in agility and in the sickness rate.
Prospective buyers will take the findings from personnel due diligence into account in their final purchase price offer.
Very important is the examination of possible pension obligations and their coverage. Pension obligations can be a deal breaker.
Prospective buyers often take the costs of adjustments in the personnel area (layoffs, personnel search, retention measures for key personnel, etc.) and existing pension obligations as justified arguments for reducing the purchase price.