Top 10 Myths of the Human Factor of M&A

Human due diligence is an important aspect of the due diligence process because it requires more than the usual benefits and compensation analysis. If done correctly, human due diligence would allow companies to identify cost increases or hidden liabilities in a transaction.

In this short post, we will go through the top 10 myths of human due diligence.

1. Human capital is like any other due diligence: While human due diligence is tightly connected with tax, finance, and accounting due diligence, not everyone will grasp each other’s findings. For instance, human due diligence teams might use a language that is native to them. Because all due diligence results are eventually quantifiable and represented in larger financial indicators, human capital due diligence teams must ensure that their reports are easily understood.
2. It is not worth investing in human due diligence: Due diligence tasks can include lengthy hours loaded with operational complexities and a typical lack of information. However, this procedure sets you up for high rewards because those long and stressful hours are frequently encountered when a transaction closes and the newly constituted business, or combined firm, goes through a flawless transition. Conducting human capital due diligence benefits all parties involved, including the acquirer, the target, and the professional services providers. Human capital due diligence allows customers to collaborate with industry-leading professionals and benefit from their expertise.
3. There is no need to worry about benefits and compensation: Often, personnel-related expenditures are the greatest expense item on the income statement of a corporation. Therefore, identifying substantial cost increases and hidden liabilities correctly might save a transaction millions of dollars. Because human capital due diligence professionals have extensive and in-depth knowledge in a wide range of sectors, legacy liabilities, such as pensions, post-retirement medical, health care, and insurance expenditures, parachute payments, and deferred compensation schemes, must be examined by due diligence teams.
4. Due diligence is the same for any buyer: Professional services organizations usually establish processes and approaches that can be used by a variety of customers on a regular basis. On the other hand, while using best practices and sticking to what has worked in the past is typically effective, this "one-size-fits-all" approach may not always work in due diligence. M&A transactions are classified based on the type of investor who acquires the firm. There are individuals or investment firms like private equity funds seeking purchases with good cash flow. There are also firms that aim to acquire other companies in order to get operational efficiencies, increased market share, technology, or other synergies. Understanding the environment gives the due diligence team the proper emphasis to unearth important facts.?
5. Pricing a company is a straightforward process: The process of valuing a firm is time-consuming and intricate. It necessitates hundreds of pages of financial modeling as well as a tangle of strategic and operational analysis.
6. The size of the deal is not that important: Great market circumstances and massive amounts of accessible cheap financing have elevated investment to a new level. By 2015, multibillion-dollar strategic purchasers and private equity investors alike had the leverage to close transactions for more than $30 billion. At the same time, smaller firms and literally hundreds of private equity groups are closing innumerable acquisitions of $1 billion or less. As a result, you must comprehend the implications of the transaction's magnitude. A $100M payment due on change of control, for example, is critical since it may kill a $1B agreement. However, in a multibillion-dollar transaction, $100 million may represent pennies on the dollar in terms of share value.
7. Human due diligence team doesn’t need to work with other departments: In today's virtual and highly networked world, multinational corporations are interdependent, sharing resources, programs, and systems. It is crucial for the human capital diligence team to collaborate with the accounting, tax, finance, and legal diligence teams to yield overall due diligence outcomes. For example, HR will not have access to data that financial and accounting departments have, such as comprehensive trial balances and cash flow statements. Working as a team is essential for managing interdependencies.
8. It’s okay to completely rely on online data rooms: Data rooms are an essential aspect of the due diligence process in M&A. A classic data room is a physical area that is safe and constantly monitored, where advisers may check and report on the different papers and data that are accessible. A virtual data room is an alternative: an online repository with limited users, regulated access, and limited capabilities for forwarding, copying, or printing. Online data rooms can help you save money and time. However, visiting the target face-to-face or physically meeting with your team members in a war room may create an environment more favorable to open discussion and can lead to extra beneficial knowledge. As a result, while online data rooms allow you to operate 24 hours a day, both methods should be assessed based on the conditions of the business at hand.
9. Every data you want is accessible: It is very humorous (or frightening) that multibillion-dollar corporations lack paperwork ranging from an accurate count and roster of all personnel to an inventory of all benefits programs, to recorded rules and business procedures. Even if you do obtain the requested documentation, it is typically 10 minutes before your report is due. Furthermore, timing is everything. As a result, be ready to move with the flow and be awake 24 hours a day, seven days a week. You will rapidly learn to deal with incomplete facts and use your own judgment to fill in the gaps. Just be sure to properly record the gaps and any assumptions you've made.
10. You can share M&A details: M&A initiatives are undeniably appealing and prestigious – high risk/high gain, high input/high output.? While it is normal to want to share your joy with friends and family, in today's corporate world, when ethics are scrutinized, the individual you strive to impress might cost you a lot of money. M&A transactions are extremely private until publicly announced in order to maintain the integrity of the deal price and avoid illogical movements inside the firm and the market.?