Understanding the People Picture Before the Deal is Done

When a great asset comes with added complexity

Private equity investors are used to scrutinising the numbers. Revenue, margin, customer concentration, contract terms — these are the well-trodden paths of due diligence. But when our client, a newer PE-style technology investor, began looking seriously at acquiring the Australian subsidiary of an internationally owned technology business, they knew the numbers alone wouldn't tell them everything they needed to know.

The target was a genuinely attractive asset: highly specialised, mature, and profitable, operating in a niche corner of the technology market. But the transaction wasn't a simple bolt-on.  

The Australian entity would be carved out of its foreign parent and would have to operate as a fully standalone business — with no plans to integrate it into the investor’s existing portfolio. This created additional "people risk" that the investor hadn’t had to consider with their prior acquisitions. It wasn't just about the operating model and cost structure of the business today - it was a risk decision that relied heavily on an interpretation of the people capability that would come with the acquisition and whether the team could fully operate the business as a standalone operation from day one.

Our client needed a partner who could get answers to these human capital questions quickly, thoroughly, and with the kind of commercial judgement that differentiates between a genuine dealbreaker and a manageable, budgetable risk.

That’s where Rutherford HR came in.

Bringing rigour — and a genuine partnership — to the deal team

We were engaged to lead the People and HR due diligence workstream: identifying risks, opportunities, synergies and costs associated with the transaction and mapping out exactly what it would take to separate the business cleanly from its overseas parent.

From the outset, our approach was shaped by how we like to work.  

• We invest our time generously to understand the background to the transaction and the current people, talent and culture  

• We make our interactions personal, because the best insights rarely come from a data room alone; they come from conversations with members of the target team and the parent company

• We are guided by data and evidenced based approaches including M&A playbooks and a structured, commercial approach to what can otherwise be a fuzzy, subjective area of a transaction to ensure clarity of the risks, costs and opportunities as part of their overall evaluation of the deal

Three key sources shaped our findings  

First and consistent with standard due diligence processes, we worked through the virtual due diligence data room, looking for what was there — and just as importantly, what wasn't. To fill in the gaps, we established and built a close relationship with the vendor to source missing information and liaised with other key workstream leads (e.g. finance and legal) when there was overlap in our findings.

Second, we held a detailed video call with the parent company’s senior HR leader, to understand how the target company's people function had operated inside a much larger parent organisation, and what would need to be rebuilt or replaced once that support was removed.  

Finally we listened closely to the investor's own conversations with the target's leadership team, because how leaders talk about their people, unprompted, often tells you as much about the culture, risks, and customer delivery as any data room documents.

Separating the material from the manageable

One of the most valuable things a due diligence partner can do is detailing which issues actually matter to the deal, and which don't.

We identified a genuine list of gaps in the target's talent management and HR operations, including some areas of non-compliance that warranted closer investigation.  

In a less experienced pair of hands, a list like that can look alarming. However, we saw our job as bringing commercial judgement to it: none of the issues were material to the transaction itself, and all of them were addressable with modest investment during separation from the parent company and establishment as an independent entity.  

That distinction mattered enormously to our client's deal team, who needed to know where to focus their attention and where they could afford to move forward with confidence.

The one risk that did carry real weight for deal value sat squarely in compensation. Delayed salary reviews, the planned removal of the existing Option Plan, possible underpayments against award obligations, and a lack of any Long-Term Incentive Plan for senior leaders had created a genuine undercurrent of concern within the target's team.  

We flagged clearly that this combination could create retention risks and pressure for salary uplifts post-acquisition — a risk that needed to be factored into the investor's thinking on deal value and integration budget, not discovered after the ink was dry.

Beyond that headline risk, we built out a full picture of the smaller, no less important, costs of getting the carve-out right:  

• legal work to refresh the employment agreement template and complete an award compliance review

• HR support to implement contract changes and establish baseline compliance and risk management practices, from new policies through to a WHS management system

• investment in leadership capability, succession planning and performance management, none of which had existed in any formal sense inside the parent structure  

We recommended a closer look at contractor arrangements that, in practice, looked much more like employment relationships than the current paperwork suggested, creating additional risks.

We also flagged the practical reality that the target company's CEO would need support during the transition, so that his time could stay focused on strategy, key customers and new sales, rather than being consumed by the operational mechanics of standing up a new People function from scratch (and offered our support to deliver it).

Finally, we proposed the development of a detailed communication plan to bring employees through the transition without losing trust along the way.  

A strong foundation for our client's decision

Our work culminated in a detailed due diligence report. This covered our analysis across every major HR-related area, a risk matrix our client could use to prioritise approvals and investment, and specific carve-out recommendations with associated costs.  

We debriefed the senior deal team directly, walking through our findings and answering the questions that mattered most to them in the room, and identified areas that warranted more detailed financial modelling as the deal progressed.

This is exactly the kind of work we enjoy: getting genuinely close to a business before it changes hands and giving investors the clarity to move forward with their growth strategies — or hold back — with real confidence in the people story behind the numbers.

Considering an acquisition where the people risk isn't obvious yet?

Carve-outs and standalone transitions carry a different kind of people risk to a straightforward bolt-on acquisition — one that's easy to underestimate without the right level of analysis.  

If you're weighing up a deal where the target will need to build HR capability from the ground up, we'd welcome a conversation. Get in touch to find out how our M&A consulting services can help you see the full picture, and plan for an effective transition to new ownership.

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