Q & A – What is due diligence?

Q: What is due diligence?

A: Due diligence is a process of intense scrutiny in which a prospective buyer investigates a seller’s assets, business, or that portion of the seller’s business it desires to purchase. The purpose is to determine if the acquisition will achieve the company’s long-term strategic goals. This is the opportunity for the buyer to check the seller’s assets on the books and to confirm that the assumptions made and the information attained earlier were in fact correct. Many companies focus almost entirely on the seller’s financial, legal and tax issues, ignoring or underestimating the contribution that HR can make. HR due diligence can play an important role in minimizing risks and successfully integrating the combined companies. Unfortunately, HR’s involvement is often too little, too late to be effective.

HR’s due diligence should focus on the targeted companies employment practices, compensation and benefits, staffing, leadership and management practices, legal compliance, organizational structure and culture, policies and procedures, and technology etc. A thorough due diligence is essential because there are many hidden potential liabilities that buyers may take on. For example, due diligence can identify millions of dollars in executive compensation and change-of-control liabilities.

Checklists are useful in identifying and keeping track of the data and as a format for comparing the benefits and other HR practices of the buyer and seller.
HR must also analyze and dissect the data gathered. The key questions to ask about the data are, What can we work with? What can we capitalize on? What’s bad news? (For example: a poorly funded retirement plan, poor medical plans, operational and safety issues and liabilities, class action suits, outstanding litigation or investigations etc.) The critical question will always be, is there a deal-breaker hidden here?
There are innumerable other legal compliance issues to check. Some of the more obvious ones are: 1-9s, H-1B Visas, FMLA, ADA, EEO/employment discrimination laws, WARN, COBRA, HIPAA, FLSA, federal contracts, labor relations, OSHA, and workers’ compensation.
Although the task of due diligence may seem overwhelming, remember that the more information you have, the more you can understand what you are taking on, and the better you can assess and structure the deal.