Human Resources Due Diligence

Human resources due diligence reviews the employee and management structure of a target company. It examines, for example, contracts, compensation, pension commitments, and who the key people are. This allows the buyer to identify personnel risks and dependencies. Its scope covers headcount with age structure, turnover and absence rates, employment contracts including fixed-term and agency arrangements, works agreements and collective bargaining coverage, the co-determination situation with works council and where applicable supervisory board, pending employment disputes, and the compensation structure with variable elements and special commitments.

Two topics carry particular weight. First, occupational pensions, because underfunded obligations act economically like debt and can reduce the price as debt-like items. Actuarial reports and the discount rates applied need review. Second, dependence on individuals, especially the existing owner, whose customer relationships and know-how can be lost after a sale, which is one of the most frequent value-reducing findings in the mid-market. The effectiveness of non-compete clauses, notice periods for senior staff and existing retention programmes are therefore also examined. In an asset deal, the review additionally establishes which employment relationships transfer with the business and which information and consultation steps are required before closing. Employee objections can change the available workforce and therefore the transition plan.

The findings feed into price, warranties and post-completion planning. Retaining key people is a workstream of its own for the buyer and starts before completion: retention bonuses payable after a defined period of service, adjusted compensation models and participation in future value creation are the usual instruments. Non-compete clauses need to be assessed by the category of person and the contract terms. For employees, a binding post-employment restriction requires compensation. Its cost belongs in the plan alongside possible retention bonuses. The age structure of the workforce is also relevant for valuation, because a high proportion close to retirement implies foreseeable replacement needs and corresponding costs.

Note: This explanation is for general information only and does not constitute legal advice. The legal position depends on the individual case and may change with new legislation or case law. For a binding assessment, please consult a qualified lawyer.