Identifying Risks Before Acquisition

You’ve found a great business that you want to buy.  You’ve done your due diligence and are ready to sign. 

Wait…have you really uncovered all of the risks?

One area that is often overlooked when buying a business is the Human Resources related factors.

Harvard Business Review estimates that 70-90 percent of all M&As fail to achieve their anticipated strategic and financial objectives. This rate of failure is often attributed to various HR-related factors, such as incompatible cultures, management styles, poor motivation, loss of key talent, lack of communication, diminished trust, and uncertainty of long-term goals.

In this article – the first of two on HR-related factors to consider when buying a business – we cover common HR-related areas to question when buying a business.

Watch for unexpected risk

First, it’s vital to lay a solid foundation. This involves risk mitigation, to avoid a host of legal and financial issues down the track.

  • Review contracts for ‘specialarrangements

All staff should work on a level playing field, going forward. This means streamlining and regulating wages and benefits to ensure fairness and equity. Pay close attention to any arrangements specified in employment contracts that skew the books. Ask also about arrangements documented in any other way, or even not documented, but mutually agreed verbally.

  • Check ‘change of ownership’ financial payouts

If anyone at the firm has a financial stake in the business, the acquiring company will need to honor this. Ensure all arrangements are paid out before the ownership rolls over.

  • Watch for “discretionary” bonuses

So-called “discretionary” bonuses are a common remuneration strategy. However, if they’ve been routinely paid out over a few years, they’re no longer seen as “discretionary” by staff – payment is expected.  So dig deep. Be on top of existing financial arrangements.

Run a cultural scan

Pay attention to potential cultural clashes. In this respect, prevention is better than cure! Carry out an organisational sweep to detect weak spots.

  • What is the state of client/customer relationships?

You need to know how strong the existing relationships are, and how well they are being managed. It’s easy for customers to feel neglected during acquisitions, so be sure not to lose ground.

  • How strong are employee relationships with the business?

Do employees feel respected and valued? Ask to see internal company feedback from staff. Look for their perception of leadership/management, communication, and the extent to which they’re well supported to do their jobs. Have there been any legal claims from staff in recent years?

  • How are leadership and management perceived?

This is the litmus test for workforce health. Leaders play a huge role in establishing and maintaining strong company culture, so failure here will have a significant effect on team morale.

  • What does the talent profile look like?

The acquired workforce will be an unknown quantity. So, you need to investigate performance and potential to get a genuine view of your talent pool. Once you know the strengths and weaknesses of your combined workforce, you can draw up a communication and integration strategy going forward.

  • What gets rewarded in the business, and how?

Dig into the current reward system within the business. Is it fair and realistic? If not, now is the time to realign company expectations, with a new set of benchmarks and incentives.

  • Is anyone stalling?

When you’re asking these questions pay attention if anyone is stalling. Identify anyone treading water or holding back, and draw up a plan to get them up to speed.

Want to find out more? Contact us for assistance with identifying HR-related risks when buying a business and don’t miss our next article on how to communicate change and get people aligned after an acquisition.


Meta description: Mergers and acquisitions can be challenging times. Learn how to manage HR-related risk and integrate different cultures, to ensure you are on the same page.