Edward Breen, Chairman and CEO of DuPont (now DowDuPont), emphasized the critical role of HR due diligence during the $120 billion Dow-DuPont megamerger, stating: “The human capital side is the most important part of this merger”. This highlights how mergers and acquisitions are not just about numbers and legal contracts. They are fundamentally about people.
HR due diligence in mergers and acquisitions involves a thorough review of employees, company culture, and workforce-related risks before completing a deal. While financial and legal assessments are essential, understanding the human element is equally important because employees drive business performance. Additionally, examining contracts, benefits, retention risks, and cultural fit helps identify potential challenges that could impact integration and long-term success.
In this article, we’ll explore the key aspects of HR due diligence, why it matters in M&A, and how companies can effectively evaluate and manage the people side to ensure a successful transaction.
What is HR due diligence?
Human resources due diligence is a focused part of the overall due diligence process in mergers and acquisitions (M&A) that examines the target company’s human capital. It involves evaluating all employee-related factors such as contracts, compensation and benefits, compliance with labor laws, workplace culture, talent management, and potential risks tied to personnel.
It also includes reviewing the HR systems and HR processes, meaning an assessment of the tools, technologies, and workflows used to manage HR functions. This covers HR information systems, payroll, performance management, recruitment, training, and record-keeping.
The goal is to identify any HR liabilities or issues that could impact the success of the transaction or ongoing operations.
Unlike general due diligence, which reviews broad areas like financials, legal matters, and business operations, HR due diligence focuses specifically on the workforce and employment-related risks and opportunities.
While general due diligence provides an overall picture of the company’s health, HR due diligence drills down into people-centric elements to ensure smooth integration and informed decision-making regarding the company’s human capital.
Why HR due diligence matters in M&A
The HR due diligence process is strategically important because employees represent a company’s most valuable asset. Studies show that approximately 70% of M&A deals fail to achieve their expected value, with people-related challenges, such as cultural misalignment, loss of key talent, and lack of engagement, being major factors behind integration failures.
While financial considerations often drive M&A decisions, addressing human factors is critical to ensure long-term success.
By proactively conducting HR due diligence, the seller can control the narrative, presenting transparent information about workforce matters. This early disclosure helps uncover potential risks like unresolved disputes or gaps in HR policies, reducing surprises that could delay or derail the deal.
For the acquiring company, the diligence process builds confidence by clarifying workforce strengths and liabilities, enabling better valuation and negotiation. It also supports integration planning by identifying challenges early, facilitating a smooth transition, and improving cultural alignment for successful integration.
Tip for sellers: Learn how to prepare your workforce for a successful deal — check out our guide on sell-side due diligence.
Key areas to cover in HR due diligence
When it comes to people due diligence, there are a few essential areas every buyer should take a close look at:
- Employment contracts and agreements. Review to identify severance obligations, severance plans, and non-compete clauses that could impact the cost and complexity of the integration process.
- Compensation and benefits. Analyze salary structures, bonuses, pensions, and employee benefits such as sick leave and maternity leave, which affect employee satisfaction and retention.
- Workforce composition and demographics. Assess headcount, turnover rates, diversity, and critical roles to evaluate workforce stability and risks of potential loss of talent.
- Compliance with labor laws and regulations. Ensure adherence to employment laws, union agreements, and health and safety standards to avoid legal penalties and reputational damage.
- Organizational culture assessment. Evaluate company culture, leadership styles, and employee morale, as cultural clashes contribute to nearly 30% of M&A failures.
- HR policies and procedures. Review recruitment, onboarding, performance management, and disciplinary procedures to ensure consistency and legal compliance.
- Litigation and disputes. Identify ongoing or past employee grievances, lawsuits, or arbitration cases that may pose financial or reputational risks.
- Training and development programs. Assess the proper utilization of resources dedicated to employee growth and readiness for future challenges.
- Workforce integration readiness. Evaluate change management plans and communication strategies to prepare employees for the transition.
- Key talent assessment. Identify key employees, succession plans, and talent management strategies critical for continuity post-transaction.
You might also like: Explore how to evaluate environmental risks in a transaction — read our guide on environmental due diligence assessment.
HR due diligence checklist
Here’s a comprehensive HR due diligence checklist to help assess people-related risks and integration challenges before a transaction:
| Category | What to review | Key considerations |
| Organizational structure |
ꪜ Company org charts ꪜ Reporting lines ꪜ Leadership roles and responsibilities ꪜ Key employees and dependencies ꪜ Potential redundancies or overlaps post-transaction |
🔸 Are reporting lines clear and efficient? 🔸 Who are the critical leaders and how dependent is the business on them? 🔸 Where might roles overlap after integration? |
| Employee contracts |
ꪜ Signed employment agreements ꪜ Offer letters ꪜ Non-compete and non-solicit clauses ꪜ Confidentiality and IP agreements ꪜ Severance terms ꪜ Change-of-control provisions |
🔸 Are contracts compliant with local laws? 🔸 Do non-compete clauses protect business interests? 🔸 Are severance and change-of-control terms financially manageable? |
| Compensation and benefits |
ꪜ Base salaries and pay grades ꪜ Bonus and incentive structures ꪜ Stock options and equity grants ꪜ Benefits (healthcare, retirement plans, etc.) ꪜ Deferred compensation ꪜ Unused paid time off (PTO) liabilities |
🔸 Are pay structures competitive and fair? 🔸 Are incentive plans aligned with business goals? 🔸 What is the total cost of benefits and liabilities like PTO? |
| HR policies and procedures |
ꪜ Employee handbook and code of conduct ꪜ Onboarding and offboarding processes ꪜ Disciplinary and grievance procedures ꪜ Anti-discrimination and harassment policies ꪜ Remote work and leave policies ꪜ Compliance with local labor laws |
🔸 Are policies up-to-date and clearly communicated? 🔸 Are onboarding and offboarding handled consistently? 🔸 Is there evidence of policy enforcement and legal compliance? |
| Workforce demographics |
ꪜ Headcount by department ꪜ Employment status (full-time, part-time, contractor) ꪜ Geographic distribution ꪜ Tenure and experience levels ꪜ Diversity statistics |
🔸 Is the workforce balanced and aligned with business needs? 🔸 Are there risks related to geographic or employment status distributions? 🔸 How diverse and inclusive is the company? |
| Performance management |
ꪜ Review and appraisal systems ꪜ Succession planning ꪜ Leadership and professional development programs ꪜ Promotion and career progression processes |
🔸 Are performance evaluations regular and objective? 🔸 Is there a clear plan for leadership continuity? 🔸 Are development programs effective in retaining talent? |
| Employee relations |
ꪜ Active or past legal disputes ꪜ Union or labor representation ꪜ Grievances or complaints filed ꪜ Results of employee satisfaction or engagement surveys ꪜ Exit interview summaries |
🔸 What are the key employee relations risks? 🔸 How engaged and satisfied are employees? 🔸 Are unions a factor and how is labor managed? |
| Recruitment and turnover |
ꪜ Recent and historical turnover rates ꪜ Average time to hire ꪜ Cost per hire ꪜ Recruitment sources and strategy ꪜ Open roles and hiring pipeline |
🔸 Is turnover higher than industry benchmarks? 🔸 Is hiring efficient and cost-effective? 🔸 Are there critical vacancies or recruitment challenges? |
| Compliance and risks |
ꪜAdherence to labor laws (GDPR, FLSA, EEOC, etc.) ꪜHR audit reports ꪜImmigration and visa compliance ꪜWorkplace safety and health compliance |
🔸 Are there outstanding compliance issues or risks? 🔸 Are audits clean and corrective actions taken? 🔸 Is immigration status properly managed? |
| Culture and integration |
ꪜ Cultural values and communication norms ꪜ Team dynamics and morale ꪜ Readiness for post-merger integration ꪜ Leadership alignment with the buyer’s culture ꪜ Internal communication practices |
🔸 How compatible are the two companies culturally? 🔸 Is morale high or are there signs of disengagement? 🔸 Are leaders prepared to drive integration? |
Additional read: Looking beyond due diligence? Explore our post-merger integration checklist to ensure a smooth transition and successful alignment of people, processes, and culture after the deal closes.
Common HR red flags uncovered during due diligence
Identifying HR red flags early in due diligence is crucial to mitigate risks. The following table details common warning signs, their potential impact, and ways to resolve them.
| Red flags | Description | Solutions |
| High employee turnover |
Frequent departures may indicate low job satisfaction, poor management, or cultural issues. |
Conduct employee surveys, improve management practices, and enhance retention programs. Deloitte found that companies using financial retention awards saw attrition drop to under 5%, proving the value of targeted retention strategies during M&A. |
| Non-compliance with labor laws |
Failure to follow regulations can result in legal penalties and damage to reputation. |
Perform regular legal audits, update policies, and train HR staff on compliance. |
| Incomplete or inconsistent employee records |
Missing or inaccurate documentation can cause issues in benefits administration and legal disputes. |
Implement a centralized HRIS system and audit records for completeness. |
| Unclear compensation structure |
Lack of transparency or fairness in pay can lead to employee dissatisfaction and disputes. |
Develop clear salary bands, communicate compensation policies, and conduct market benchmarking. |
| Pending or unresolved disputes |
Existing conflicts may escalate post-acquisition, affecting morale and productivity. |
Establish a formal conflict resolution process and settle outstanding issues. |
| Ineffective onboarding process |
Poor integration of new hires can reduce productivity and increase early turnover. |
Standardize onboarding procedures and provide mentorship or training programs. |
| Lack of diversity and inclusion initiatives |
A homogeneous workforce can limit innovation and pose reputational risks. |
Create D&I policies, set measurable goals, and foster an inclusive culture. |
| Insufficient training and development |
Employees lacking growth opportunities may feel undervalued and leave. |
Implement continuous learning programs and career development plans. |
How to prepare your HR department for due diligence
Preparation is key to a successful diligence process and building buyer confidence. Companies should:
- Organize all HR documentation, including contracts, policies, and employee records, ensuring they are current and easily accessible.
- Conduct internal audits to identify and resolve any HR compliance issues or disputes ahead of buyer review.
- Prepare clear summaries of workforce data, including headcount, turnover, compensation, and employee benefits.
- Utilize a secure HR data room to centralize sensitive HR information, control access, and track document activity. Read our guide on applying due diligence virtual data rooms to learn more about the tool.
- Communicate transparently with employees to maintain morale and support change management during the transaction.
- Develop detailed integration planning focused on cultural alignment, retaining employees, and ensuring a smooth transition.
Key takeaways
- HR due diligence uncovers workforce risks that often derail M&A deals, such as cultural clashes and talent loss.
- Detailed review of contracts, benefits, compliance, and employee data reveals potential financial and legal liabilities.
- Analyzing turnover rates and leadership stability highlights areas needing attention before integration.
- Early identification of issues like unresolved disputes or unclear compensation prevents costly surprises later.
- A structured HR checklist ensures no critical human capital aspect is overlooked during due diligence.
- Sellers improve deal outcomes by organizing records, addressing compliance gaps, and managing employee expectations.
- Secure virtual data rooms streamline document management, protect sensitive information, and track due diligence activity.
- Prioritizing cultural alignment and employee retention strategies during integration maximizes post-merger success and value.
