In the exciting world of Mergers and Acquisitions (M&A), it’s always been about ‘the numbers.’ People buying businesses to integrate into their own, or investing to ‘scale and flip’ want to see proof of success.
This has historically been evidenced in the Management and Audited Accounts. Hence the requirement for purchasers and their advisors to conduct Financial Due Diligence: a comprehensive analysis of the target company's financial statements, accounting practices, tax records, and overall financial health. This helps them understand the company's historical performance, identify financial risks, and evaluate the accuracy of the target’s financial projections.
As the Governance requirements increased and, with them, Director’s Liabilities, greater Legal Due Diligence became the order of the day. Examining the target’s legal structure, contracts, permits, litigation history, and compliance with relevant laws and regulations. Trying to forestall any future legal complications.
The development of Marketing and Branding added extra sophistication to the scope of Commercial Due Diligence: focusing on the target's market position, competitors, customer base, and brand equity. Evaluating future growth potential.
As time has passed, further layers of Due Diligence have been added to check on Intellectual Property, IT, Operations and Environmental impact. The present-day focus on the Environmental, Social and Governance (ESG) framework assesses an organisation's business practices and performance on a range of ethical issues. So there’s plenty of work to be done before investors think about writing that cheque.
Perhaps the most important change has come in the way investors look at human capital and organisational culture. Indeed, in the most successful M&A projects I am involved with, that’s where the Private Equity team begin their enquiries. They walk the floors and knock on the doors, talking to management and staff. They devour staff engagement studies as voraciously as market reports. They understand that, in today's knowledge-based economy, the true value of a company lies in its people and culture. So, they take pains to understand ‘the way we do things around here’.
The modern approach to Human Resources Due Diligence goes beyond identifying critical employees and retaining them post-acquisition. It’s about making sure that you are buying a company and not a balance sheet. Companies are social constructs; they exist because human beings agree to work in them. The struggles we faced with company cohesion during the pandemic, and now in its aftermath, show how fragile organisations have become. Add to that the radically different attitudes to work expressed by younger generations of employees and investors are right to fret about the human dimension. If employee morale declines and discretionary effort drops, a shiny new acquisition will soon tarnish.
Chris Harrison leads The Brand Inside
www.thebrandinsideafrica.com