Although identifying (and quantifying) human resource-related risks can be challenging, those tasked with leading the human resource due diligence process will ultimately need to ensure that any human resource risks are appropriately captured in the valuation model. Specifically, private equity firms will want to understand observations that have any earnings and balance sheet impact (or ‘quality of earnings’ and ‘debt-like adjustments’, respectively), and whether any adjustments to the private equity firm’s financial model are warranted.
Financial risks specifically include material changes to the human resource-related run-rate costs of the target company, financial obligations triggered as a result of the contemplated transaction, and unfunded benefit plans. Operational risks might include high employee turnover, difficult labour relations, concern over cultural fit or change-management challenges/requirements.
While these operational risks are often revealed during due diligence, they are typically addressed during the transition of ownership.
Private equity firms tend to focus their human resource due diligence efforts around the which can yield valuable insights and help to reveal any human resource-related red flags:
- Employee demographics and key terms of employment.
- Material compensation and benefit programs
- Management talent assessment.
- Human resource transition challenges.
This is an excerpt by Steve Rimmer and Aaron SanAndres of PwC