Why Employees Are the Most Valuable — and Risky — Asset in Any Acquisition
When you buy a business, you’re not just acquiring equipment, customer lists, and cash flow. You’re inheriting a workforce — people with institutional knowledge, customer relationships, technical skills, and cultural expectations that can make or break your acquisition.
Yet employee-related due diligence is one of the most overlooked aspects of the business buying process. Buyers obsess over financial statements and equipment lists while barely glancing at the org chart. This is a critical mistake.
Consider this: a business’s revenue is generated by its people. If key employees leave after the acquisition, that revenue walks out the door with them. If you inherit employee-related liabilities — unpaid wages, benefits disputes, pending HR complaints — those costs come directly out of your pocket. And if the workforce culture is toxic or mismanaged, turning it around will consume time and money you haven’t budgeted for.
This guide provides a comprehensive framework for evaluating employees during the business acquisition due diligence process.
Building Your HR Due Diligence Checklist
Effective HR due diligence covers six key areas. Let’s walk through each one in detail.
1. Organizational Structure and Key Personnel
Start by understanding who does what and who matters most:
- Organization chart: Get a complete org chart showing reporting relationships, departments, and span of control
- Key employee identification: Identify employees who are critical to the business’s operations, customer relationships, or institutional knowledge. These are the people you absolutely cannot afford to lose.
- Owner dependency: Determine how dependent the business is on the current owner. If the owner handles all sales, manages all key client relationships, or possesses unique technical expertise, the business has a significant key-person risk.
- Management depth: Evaluate whether the management team can operate independently. A strong management team significantly reduces transition risk.
- Succession gaps: Identify roles where departure of a single individual would create a critical operational gap
2. Compensation and Benefits Analysis
Understanding the full cost and structure of employee compensation is essential for accurate financial projections:
- Salary and wage schedules: Get a complete list of all employees with their current compensation, including base salary, hourly rates, overtime patterns, and commission structures
- Bonus and incentive programs: Document any bonus plans, profit-sharing arrangements, or incentive programs. Are there any unpaid bonuses or deferred compensation obligations?
- Health insurance: Review the current health insurance plan, employer contribution levels, employee participation rates, and upcoming renewal terms
- Retirement benefits: Evaluate any 401(k) plans, pension obligations, or other retirement benefits. Are employer matches current? Are there any unfunded pension liabilities?
- Paid time off: Review PTO policies, accrued but unused vacation balances, and sick leave obligations. Accrued PTO represents a real financial liability.
- Other benefits: Vehicle allowances, cell phone stipends, education reimbursement, gym memberships — document everything that contributes to total compensation
3. Employment Agreements and Legal Documents
Review all employment-related legal documents carefully:
- Employment contracts: Are any employees under written employment agreements? What are the terms, including duration, termination provisions, severance clauses, and change-of-control provisions?
- Non-compete agreements: Do key employees have non-competes? Are they enforceable? If key employees don’t have non-competes, they could leave and compete with you immediately after the sale.
- Non-disclosure agreements: Are employees bound by NDAs protecting trade secrets, customer information, and proprietary processes?
- Independent contractor agreements: Are any workers classified as independent contractors? Misclassification is a significant liability risk — if the IRS or state labor department reclassifies contractors as employees, you could face back taxes, penalties, and benefits obligations.
- Offer letters: Review offer letters for any promises made regarding compensation, benefits, job security, or other commitments
4. Employment Law Compliance
Non-compliance with employment laws creates liabilities that transfer to you in a stock purchase and can create complications even in an asset purchase:
- Wage and hour compliance: Is the business properly classifying employees as exempt vs. non-exempt? Are overtime laws being followed? Wage and hour lawsuits are among the most common and expensive employment claims.
- I-9 verification: Are all employees authorized to work in the United States? Are I-9 forms properly completed and retained?
- OSHA compliance: Review workplace safety records, any citations or violations, and the overall safety program
- Anti-discrimination compliance: Any pending EEOC complaints, discrimination claims, or harassment allegations?
- FMLA and leave compliance: Is the business meeting its obligations under the Family and Medical Leave Act and applicable state leave laws?
- Workers’ compensation: Review the workers’ comp experience modification rate (EMR), claims history, and current policy terms. A high EMR indicates a poor safety record and results in higher insurance premiums.
- Unemployment claims: Review the history of unemployment claims, which can indicate turnover problems and affect your unemployment insurance rates
5. Union Contracts and Labor Relations
If the business has unionized employees, this adds a significant layer of complexity:
- Collective bargaining agreements (CBAs): Review all current CBAs in detail. These contracts govern wages, benefits, work rules, grievance procedures, and termination rights. You’ll be bound by their terms.
- Pending grievances: Are there any unresolved grievances or arbitration proceedings?
- Contract expiration: When do current CBAs expire? Upcoming negotiations represent both a risk and an opportunity.
- Unfunded obligations: Are there any unfunded pension or retiree benefit obligations under union contracts?
- Labor relations climate: What’s the overall relationship between management and the union? A contentious relationship means you’ll be walking into a difficult situation.
- Successorship obligations: Under the National Labor Relations Act, a “successor employer” may be required to recognize and bargain with the existing union, even in an asset purchase. Understand your obligations before closing.
6. Culture and Morale Assessment
Numbers and documents only tell part of the story. The cultural health of the workforce is equally important:
- Turnover rates: What’s the voluntary and involuntary turnover rate? High turnover indicates problems — poor management, inadequate compensation, or toxic culture.
- Tenure distribution: A workforce with long tenure suggests stability and loyalty. A workforce dominated by recent hires suggests chronic retention problems.
- Employee reviews and feedback: If available, review employee satisfaction surveys, Glassdoor reviews, or exit interview data
- Management style: How does the current owner manage? Authoritarian owners who make every decision create dependent workforces that struggle with change. Empowering leaders create teams that can handle transitions.
- Informal leaders: Identify the informal influencers — employees whose opinions carry weight regardless of their title. Winning these people over during the transition is critical.
Key Employee Retention During Transition
Identifying key employees is only the first step. You need a plan to keep them.
Why Key Employees Leave After Acquisitions
Understanding why employees leave helps you prevent it:
- Fear of change: Uncertainty about the new owner’s plans, management style, and expectations
- Loyalty to the seller: Long-time employees may feel their allegiance is to the departing owner, not the business
- Poaching: Competitors may aggressively recruit employees during the transition, knowing they’re vulnerable
- Cultural mismatch: If your management approach differs significantly from the seller’s, employees may decide it’s not for them
- Broken promises: If the transition doesn’t match what employees were told to expect, trust erodes quickly
Retention Strategies That Work
- Stay bonuses: Offer key employees a retention bonus payable after a specified period (typically 6-12 months) post-closing. This creates a financial incentive to stay through the critical transition period.
- Employment agreements: For truly critical employees, offer formal employment agreements with competitive terms, including salary guarantees, benefit continuity, and clear role definitions.
- Early communication: Meet with key employees as soon as possible after closing (or even before, if the seller agrees). Address their concerns directly and share your vision for the business.
- Maintain stability: Resist the urge to make sweeping changes in the first 90 days. Employees need time to build trust with the new owner before accepting major changes.
- Involve them in planning: Ask key employees for their input on the business’s strengths, weaknesses, and opportunities. This demonstrates respect and creates buy-in.
- Preserve the culture: If the existing culture is healthy, protect it. Don’t impose a new corporate culture on day one.
How Employee Retention Affects SBA Lender Confidence
SBA lenders don’t just evaluate your financial projections — they evaluate the likelihood that those projections will actually materialize. And employee retention is a key factor in that assessment.
What Lenders Look For
- Key employee dependency: If the business is heavily dependent on one or two key employees, lenders want to see a retention plan. Without one, the loan is riskier because those employees leaving could tank the business.
- Management continuity: Lenders prefer deals where capable management stays in place, especially if the buyer doesn’t have direct industry experience.
- Workforce stability: A history of low turnover and long employee tenure reassures lenders that the workforce will remain intact through the transition.
- Transition planning: Lenders want to see a thoughtful transition plan that addresses employee communication, retention incentives, and contingency plans for key departures.
How Poor HR Due Diligence Can Kill Your Loan
We’ve seen SBA loans declined or delayed because of employee-related issues:
- Discovery of pending employment litigation during underwriting
- Key employees indicating they plan to leave after the sale
- Wage and hour compliance issues that create contingent liabilities
- Unfunded benefit obligations that weren’t reflected in the financial projections
- Worker misclassification risks that could result in significant back-tax exposure
Thorough HR due diligence identifies these issues before they surprise your lender — giving you time to address them or adjust your deal terms accordingly.
Practical Tips for Conducting HR Due Diligence
Timing Matters
Start HR due diligence early in the process, not as an afterthought. Employee-related issues can take time to investigate and resolve, and discovering them at the last minute can delay or kill your closing.
Use Professionals
Consider engaging an HR consultant or employment attorney to assist with the due diligence review, especially for businesses with complex employee structures, union relationships, or regulatory requirements.
Interview Key Employees (Carefully)
If the seller permits, have confidential conversations with key employees before closing. This gives you invaluable insight into the workforce dynamics that no document can provide. But be careful — these conversations must be handled sensitively to avoid causing alarm or violating confidentiality.
Document Everything
Create a comprehensive HR due diligence file that includes all documents reviewed, issues identified, and resolution plans. This documentation will be valuable for your SBA lender, your attorney, and your post-closing integration planning.
Build Post-Closing HR Costs Into Your Projections
If HR due diligence reveals issues that need to be addressed — compliance gaps, below-market compensation, benefit improvements, retention bonuses — build those costs into your financial projections. Your GoSBA business plan should reflect the true cost of the workforce, not just the seller’s historical numbers.
How GoSBA Supports Your Acquisition Due Diligence
HR due diligence is one piece of the comprehensive due diligence process that every SBA acquisition requires. At GoSBA, we support our clients through every aspect of this process:
- 50+ lender network: We match you with lenders who understand your industry’s specific workforce dynamics — whether that’s healthcare staffing requirements, union labor in manufacturing, or key-person risk in professional services
- $320M+ funded in 2025: Our experience across hundreds of acquisitions means we know exactly what lenders want to see regarding employee retention and HR compliance
- Free business plan and financial projections: Our professionally prepared plans (valued at $2,500-$5,000) incorporate realistic workforce costs, retention bonuses, and any HR-related adjustments identified during due diligence
- 100% free service: GoSBA never charges borrowers — our lenders compensate us at closing, so you can invest in quality HR and legal professionals for your due diligence
- End-to-end guidance: From pre-qualification through closing, we help you navigate every aspect of the SBA acquisition process
Don’t Let HR Surprises Derail Your Deal
The workforce you inherit can be your greatest asset or your biggest liability. Thorough HR due diligence protects your investment, strengthens your SBA loan application, and sets you up for a successful transition.
GoSBA has helped hundreds of buyers navigate the complexities of business acquisitions — including the critical HR component. Let us help you build a comprehensive due diligence strategy and secure the best SBA financing for your deal.
Contact GoSBA today for a free consultation and make sure you’re fully prepared before you sign on the dotted line.
