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.