Moreover, the due diligence process covers not just the financial aspects of employee benefits, such as pension plan liabilities; areas like workforce analysis and cultural alignment are becoming a normal aspect of the due diligence potential buyers undertake when looking to acquire or merge with another business.
This a trend we believe will continue, and will extend to other broader workforce metrics and issues.
How M&A due diligence is evolving
Although hard metrics like financials and pension liabilities form the basis of much M&A due diligence, there is a noticeable shift towards broader human capital analyses.
Businesses – especially those well-versed in M&A – are placing growing weight on these broader human capital topics. The coronavirus pandemic catapulted businesses into unchartered waters almost overnight; in future, organisations’ and workforces’ resilience in dealing with such unforeseen events may be central to their attractiveness as a purchase.
Dennis Gan, Managing Director in Aon’s team of M&A specialists, notes that:
“Serial acquirers – companies familiar with the M&A environment and requirements of due diligence – come into a potential purchase knowing what they need to look for; issues like financials are a given. We can foresee issues like workforce analysis and company culture becoming more commonplace in M&A due diligence in the future for these companies.”
How quickly will resilience become a standard part of M&A due diligence?
Various things will affect this:
The nature of the acquirer. Private equity firms have historically focused more on key performance indicators and hard metrics, although we are seeing a change in their approach.
Companies that do not undertake M&A activity regularly may also be slower to focus on broader human capital issues; Gan predicts that companies that “may only undertake an M&A deal, say, every five years or so, may take longer to catch up with the requirements and risks of the evolving workforce environment.”.
Bruno Monteiro da Silva, Executive Director of Aon’s M&A team, agrees, believing that “the timescale for adoption of measures like workforce resilience as part of due diligence will depend on the sophistication of the buyer”.
Monteiro da Silva notes that “workforce resilience is more important in some industries than others – the centrality of people to the hospitality industry, for instance, has been shown starkly during the coronavirus pandemic which saw businesses impacted by the huge numbers of staff isolating in summer 2021”.
External events also play their part. The coronavirus pandemic made us realise that business interruption can come swiftly, and from unexpected directions. It gave us all a jolt, in our personal and professional lives, that will change the way we react to and prepare for events in the future.
In the context of M&A, this realisation may increase the importance of broader human capital issues and accelerate the move towards prioritising these in due diligence.
Questions around whether the workforce is resilient, and employees’ wellbeing, have taken on new significance in the time of COVID-19.
The benefits of measuring softer issues in M&A due diligence
Although focusing on the broader human capital issues during a transaction has its challenges, there are numerous benefits that make it worth persevering with:
M&A causes significant disruption to an organisation and its employees. The more resilient the workforce is before the process starts, the less distracting the process will be and the less negative impact it will have on the overall business. Understanding how robust employees will be as they experience this change – and how resilient they will be to any other unforeseen events – is important to a prospective buyer.
This is particularly true when the M&A transaction is a carve-out, where employee resilience is an issue for both the acquirer and the carved-out business that will need to be separated from the seller from day one.
For potential sellers, as resilience becomes a more common consideration for buyers, having a more resilient workforce will improve the attractiveness as an acquisition target and may even enhance the sale price. By their very nature, these broader human capital areas can be harder to quantify, which can be a challenge. But as resilience becomes more prized as a criterion in M&A, tools will emerge that enable buyers to understand better the broader human capital elements of company performance.
One such solution – Aon’s Rising Resilient Self-assessment Tool – gives organisations an immediate indication as to whether their workforce is likely to be resilient.
Whether you are approaching M&A as a potential buyer or seller, you can get an instant gauge of workforce resilience by completing the tool. And if you would like to know more about the rise in intangible considerations in M&A – or more about M&A due diligence in general – you can contact our M&A team.