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What The Financial Picture Is Not Telling You
When PEs are evaluating an acquisition, trailing twelve months of revenue and profit is often the starting point. What it doesn’t show is whether the target company has the right leadership structure and operational systems to deliver on the valuation – especially with a new acquisition growth strategy.
The largest PE firms typically have entire teams dedicated to organizational assessment, operational performance and talent management. They have built frameworks, by company size and industry, that tell them with real precision what an organization should look like at a given growth stage, what the right leadership structure is, and whether the team in place can execute a specific growth plan. Most small to mid-market firms do not have that infrastructure, experience or bandwidth. This means that part of the picture, arguably the most operationally consequential part, is being neglected as an integration issue after acquisition or is being completely overlooked at the risk of the expected valuation. We recently shared a stat with our clients that as many as 90% of M&A deals fail to meet their strategic and financial goals.
The Gap: Due Diligence Is Necessary
To be clear: HR and organizational due diligence at this level is genuinely complex. It is detailed, documentation-heavy work that goes well beyond compliance review. Most people hear “HR due diligence” and think about litigation risk, government audits, or union issues. Those are real considerations, but they represent a narrow slice of what a thorough review actually covers.
True due diligence means examining the full payroll function, including payroll processing, pay structures and comp plans. It includes proper employee classification, tax filings across state, federal, and local levels, and banking structures tied to payroll transactions. It means verifying that benefits documentation is complete, that ERISA obligations are met, that 5500s are filed, and that carrier and broker relationships are clearly documented. It means reviewing retirement plan structure and confirming that employee and employer contributions are being remitted to the trust on time and with documented proof.
It also entails looking at I-9 compliance and work authorizations, understanding which employees are operating under Visa sponsorships and knowing the rules for each, when those authorizations expire, and what the exposure looks like if key technical talent is affected. For any company with an IT function, and most of those companies with 100 or more employees have one, this is not a theoretical risk.
The Organizational Question That Changes the Deal
Beyond documentation, the more consequential question is this: does the target acquisition have the structure, the leadership depth, and the execution capability to deliver on the plan you have in mind? Most small to mid-market PE firms and family offices assess the executive team. Sometimes that assessment is formal, more often it is conversational. The process should include ensuring that the leadership team and those in other key positions have the right skills for the new business plan and strategy. It also means aligning leadership around the PE’s key goals and expected outcomes, with metrics and deliverables.
ONPOINT uses the Aptive Index to help CEOs make better talent decisions, build stronger teams and create environments where employees will thrive.
But executive leadership alone does not execute an integration and valuation plan. For acquisitions, it’s also imperative to assess leadership capability and capacity at least two levels below the executive team. Not just whether those people are competent in isolation, but whether the right people are in the right roles in middle management. This is the “big miss” by the investment teams who lack the familiarity and understanding of the full leadership equation.
We use a framework called the 7 Stages of Growth, based on the book “Navigating the Growth Curve” by James Fischer. It predicts how growth will affect your organization and provides the leadership skills needed at each stage. It shares that every organization needs a balance of what might be called builder visionaries and protectors. Visionaries are the people who drive growth, push into new territory, and thrive in ambiguity. Protectors maintain systems, enforce process, and keep the organization operationally sound. The ratio of those two profiles, matched against the company’s size and growth stage, follows patterns grounded in organizational science. Get that balance right, and the organization can scale. Get it wrong, and you will spend the first 18 months post-acquisition wondering why execution keeps stalling despite good strategy and sufficient capital – and why you had to change out 50%+ of the leadership.
This is assessable. It is measurable. And it gives you a concrete, evidence-based answer to the question every deal ultimately comes down to: can they execute and deliver on the valuation promised to the investors?
On the Sell Side: Your Organizational Story Is Part of Your Valuation
For PE firms and family offices preparing a portfolio company for sale, the people side of the business is either an asset or a liability in the deal. Most sellers do not fully recognize which one it is until they are already in the room with buyers. Buyers are looking for two things: demonstrated value and low risk. Every element of organizational readiness contributes to one or the other.
When It’s Time to Get Help
Start the organizational work at least six months before going to market: Most companies begin their pre-sale preparation 6 to 12 months out, focused on financial records, broker relationships, and market positioning. The organizational and operations assessment is almost always the last thing addressed, if it is addressed at all. Due diligence is often started late in the sell cycle, sometimes 2-4 months prior to acquisition. These are missed opportunities.
The majority of expense leakage in any company happens on people and systems sides of business. Companies can directly impact EBIDTA by at least 1x by getting in at that 6–12-month mark to identify gaps, clarify succession strategy and go beyond the documentation. It provides an opportunity for strategic design of structure, staffing mix, processes, pay, and benefits.
Mitigating risk and leveling up processes adds directly to the bottom line. By reducing exposure and boosting performance, there’s a stronger chance for better EBIDTA and valuation. That distinction matters enormously in a buyer conversation. If you can present evidence that a challenge was identified, addressed, and resolved before you went to market, you are demonstrating management maturity and operational credibility. If a buyer surfaces the same issue during due diligence, you are negotiating from a weaker position and may be financially penalized vs increasing valuation in deal negotiations.
Build the documentation that sophisticated buyers expect
Buyers want to see that the organization runs on repeatable, documented processes, not on the institutional memory of a few key people. The CEO should not be the one source of truth or the only relationship builder. Weak or non-existent succession plans are often a deal breaker or factor for lower valuation. It’s important to put formal programs in place for performance management, onboarding, training, and development. Compensation structures must be consistent and logical by industry and market sector, level and job type, with variable incentive programs that retain key talent. Succession planning must demonstrate organizational depth and reduce key-person risk. These programs do not need to be elaborate. They do need to be real, in practice, and documented. Buyers can tell the difference between a program that exists on paper and one that actually runs the business.
Bring in third-party credibility for the organizational story
When a company presents its organizational assessment built entirely in-house, buyers are appropriately skeptical. The people presenting that information have an equity stake in the outcome. It’s expected that the story will be favorable. Third-party organizational assessment changes that dynamic. An independent expert who has reviewed your leadership structure, your execution capability, your systems and processes, and your compliance documentation, carries a weight that internal documentation cannot. It is the same principle that drives you to bring in a financial advisor or a marketing consultant for other parts of the deal. The people and organizational side of your business deserve the same standard of independent validation, and buyers respond to it accordingly.
The Math Is Straightforward
Employees are often one of the top expense lines and where most of the leakage appears in cost containment. Leadership misalignment and lack of role clarity is also the biggest impetus of brand degradation, customer dissatisfaction, employee retention and productivity.
Here’s a shocking fact: HR consulting companies are typically one of the lowest cost consulting engagements for a deal. Yet, a strategic firm can activate the biggest lever on margin effect and risk mitigation. On a portfolio company with $20M in EBITDA, the difference between a 6x and a 7x sale multiplier is $2 million. The right HR consultant can dramatically impact valuation and EBITDA by 1x. The ROI case is not complicated. It is just consistently underweighted in the deal planning process, because this kind of work has not traditionally been seen as part of the M&A toolkit.
That is changing. The firms that build HR overview into their deal process systematically on both the buy and sell side are seeing better and faster results and returns. They are making better acquisitions because they understand what they are actually buying. And they are achieving better exits because they are telling a complete and more credible story about the asset they are selling.
