Management due diligence

Management Due Diligence is the process of scientifically evaluating the executives who make up the senior management team(s) prior to the close of a business deal that involves integrating the functions and cultures of two or more companies (private equity buyouts, mergers or acquisitions). The process is also known as management assessment.

No prudent executive would think of going forward with a deal unless extensive due diligence has been completed in the areas of legal and finance. Deal-makers often find these concrete issues easier to deal with than the so-called “soft” areas such as those involved with talent management. However, a recent survey indicates that two thirds of respondents believe that poor company performance is either very often or always attributable to management issues.[1] Failure to assess the senior management talent pool from the viewpoint of the new strategic vision can cause the value of the transaction to be under leveraged by millions of dollars and allow major slowdowns in productivity during the transition.

Five key questions the management due diligence process should answer are:

1. Will this management team be able to execute our growth strategy?
2. Will the organization’s culture support the objectives or get in the way?
3. How can we accelerate management’s ability to execute the investment thesis?
4. Which players do we keep? Who needs to go?
5. How will this management team partner with us?

Management evaluation is often over-reliant on past performance and references when determining whether an individual or team fits with a company and the expectations for that company. The key is to find a match between leadership and strategic vision. With this information, decisions can be made to ensure the right people are in position to bring the acquisition to maximum profitability without losing valuable time and momentum. [2]

The HR Process for Making Staffing Decisions

There are several admonitions the acquirer should consider.

First, the new owner should not be tempted to “go with the familiar person.” This tactic does not sufficiently minimize the risks involved.

Second, there is real danger in deciding to “Do nothing and wait for the dust to settle.” It may, on the surface, appear that in employing this approach one is exercising sage restraint. But some good people may choose to leave while the merger is still stirring up dust. Others will have been waffling along with a wait-and-see attitude. And some will have done damage that could have been prevented by a more timely termination or reassignment. Undoubtedly, the organization will have lost some momentum unnecessarily while also wasting an excellent opportunity to motivate people.

Third, sweeping personnel changes that follow closely on the heels of an acquisition, and which proceed without any systematic appraisal of those people being terminated, come at too dear a cost.^[1]

Sources and references

1. ^ "Mergers and Acquisitions: The HR Process for Making Staffing Decisions" MergerIntegration.com

• Lajoux, A.R., & Elson, C.M. (2000). The Art of M&A Due Diligence. New York: McGraw-Hill
• Bond Gunning, A. (Ed.). (2007) “Human Capital in Private equity.” London
• Harding, D., & Rouse, T. (2007, April). “Human Due Diligence,” Harvard Business Review, 85(4).
• Astorino, D., (2009). “Five Roadblocks to Successful Acquisition Integration,” Executive Insights, 24(2).