Navigating the Labyrinth: How to Get HR Due Diligence Right in M&A
When M&A transactions falter, the root cause often lies within people-related issues. HR due diligence (HR DD) is therefore not merely a procedural step but a critical workstream that offers people leaders a unique opportunity to make a significant commercial impact. People-related costs, liabilities, and opportunities can materially influence the decision to acquire a company and its valuation. It is no surprise, then, that HR DD is receiving ever-increasing focus from M&A decision-makers.
This article, drawing insights from our recent webinar, delves into key considerations for optimising HR DD, addressing emerging hot topics, and outlining the critical success factors for navigating this complex landscape.
What is HR Due Diligence?
HR DD is the process of identifying, assessing, and quantifying people-related risks and opportunities in transactions. Its purpose is to link HR findings directly to valuation, deal execution, and post-deal planning.
The recent best-practice guideline for HR DD, co-authored by Deloitte and the ICAEW, marks a pivotal moment, establishing HR DD as a key workstream for successful transactions. It provides a comprehensive framework to ensure all aspects of people-related risks are considered, covering:
Crucially, HR DD is not a one-size-fits-all exercise. It must be meticulously tailored to the target's specific context, considering its size, location, and industry. A small, founder-led start-up with developing HR processes presents different challenges to a large, long-established business with complex reward structures and entrenched labour relations. Similarly, geographical nuances, such as statutory end-of-service payments or varying litigation landscapes, demand specific attention.
What hot topics should HR DD pay particular attention to?
The regulatory and operational environment for HR is in constant flux, introducing new complexities that require careful navigation during due diligence. Here we consider four recent hot topics:
1. Contingent workforce
The rise of the contingent workforce i.e. individuals engaged directly, via personal service companies, or through labour supply chains (e.g., umbrellas, agencies, MSPs) introduces significant complexities.
Key risks include:
During HR DD, it is crucial to review the target's engagement processes, identify gaps in risk management, and assess worker classification. The geographic spread of contingent workers also needs analysis, as this could result in the need to consider differing labour laws, tax rules, and cultural factors.
Buyers should also evaluate how contingent roles fit the new structure and consider integration options, including costs, key person risks, and the legal complexities of novating contracts.
2. Employment Rights Act 2025
The Employment Rights Act 2025 introduces wide-ranging reforms that will significantly reshape the UK employment law landscape, bringing greater cost and reduced flexibility for employers. Purchasers must stress-test these changes during diligence:
These changes collectively mean less flexibility, greater administration, and increased risk in reshaping businesses, making robust HR DD more critical than ever to assess how these changes affect future business plans.
3. Pensions - Automatic Enrolment Compliance
Automatic Enrolment compliance is complex, and inadvertent material errors frequently arise.
Common scenarios for material inadvertent non-compliance and/or underpaid contribution risks include:
During HR DD, the full range of pension plans in place and the processes for ensuring compliance should be understood to avoid future significant rectification costs. Protections may be sought in the transaction documents where doubt about historical compliance has been uncovered.
4. Global workforce
The increasing globalisation of work, and the increasing remoteness of workers from workplaces introduces further complexities, particularly for mobile employees and international remote working:
It is important to understand the prevalence or remote working of any form, and where there may be reliance on EoRs to access talent. When planning for the future, HR DD might consider the approach taken to managing remote working risks within a target business to identify any misalignment in culture, policy and process, and to assess incremental or aggregate risk for the combined global workforce post transaction. This includes potential exposure to other local labour laws and tax rules in locations where the business may not have an existing corporate presence.
Setting M&A up for success
To navigate these complex HR landscapes and ensure a successful M&A process, it is critical to keep abreast of the latest regulatory, tax, and employment developments and factor these into HR DD. In light of the issues explored in this article, a HR DD exercise undertaken today should consider asking questions such as:
- What types of workers do you have in the business, and how are you managing your compliance with IR35?
- What pension plans, benefits, and T&Cs do all workers have in place?
- Have you thought about how the EU Pay Transparency Directive might change your processes, reporting, and reward strategy?
By adopting an analytical approach, coordinating effectively with other workstreams, and focusing on materiality, it is possible to get a good view of the risks across these topics in the short time available during a diligence process. For a planned integration, it is also important for HR DD to bring in that context and maintain a forward-looking perspective to identify and quantify risks relevant to the buyer and lay the groundwork for value creation post-acquisition.
