MEDIA RELEASE: Businesses seeking acquisition are changing the way they undertake the due diligence process by assessing employees within the takeover target, according to HLB Mann Judd Sydney corporate advisory partner, Simon James.

Mr James said the process is shifting beyond financial considerations to be equally about people and resources, and has been become more pronounced over the past six to 12 months.

“It’s not a case of the financial part no longer being important – because it is – but in recent transactions, acquiring companies are more interested in the human capital as opposed to the product or service offering.

“The acquirer will actively seek out information such as staff tenures, skills and qualifications.

“Historically, this has been undertaken further down the track, but now, the acquirer is wanting this information from the outset. How long have staff been there, and do they know what they’re doing? If there’s a high proportion of staff who have only been there for three months, that’s a red flag.

“The flip-side of course is confidentiality, and you don’t want to be engaging employees too early in the piece as people talk, and whispers of an acquisition could be a distraction neither party needs,” he said.

According to Mr James, the shift is a post-COVID legacy given the prevalence of skills and labour shortages impacting particular sectors, namely those which are employee-heavy.

He said when forecasting financial information such as projections around growth, from a due diligence perspective, that growth is increasingly dependent on growth in people.

“You’re starting to get questions around whether that’s achievable and whether you’re going to need the people to get the growth. The ability to streamline sales forces is increasingly regarded as key to the due diligence process.

“If that growth is through equipment, for example, supply chain issues have severely hampered the ability to secure the equipment,” he said.

According to the HLB Mann Judd Australian M&A Review, the second quarter of FY2023 saw a noticeable decline in the total number of transactions completed in Australia, as well as a decrease in the average deal value compared to the corresponding period in the prior year.

Based on published transaction data for Q2 FY2023, there were 270 deals completed compared to 452 in Q2 FY2022, being a decrease of 40 per cent. The average deal size decreased from $215 million in Q2 FY2022 to $84 million in Q2 FY2023, which can be attributed to a drop in the number of transactions with a deal value in excess of $100 million in FY2023 compared to FY2022.