Why does a People Audit matter before selling your business?

Selling a business is often the culmination of years, and sometimes decades, of hard work. Most business owners understand the importance of preparing their finances, reviewing contracts and seeking tax advice well in advance of a sale. However, one area is frequently overlooked until a buyer’s advisers begin their due diligence process: your people and HR arrangements.

A buyer is not just acquiring a set of accounts or a customer base. They are acquiring a workforce, management structure, employment obligations and the policies and procedures that underpin the day-to-day operation of the business.

If issues are uncovered late in the process, they can lead to difficult negotiations, delays or, in some cases, a reduction in the agreed purchase price.

This is where a People Audit can make a significant difference.

What is a People Audit?

A People Audit is a structured review of a business’s employment practices, documentation, HR processes and workforce-related risks.

It is designed to identify areas that may attract scrutiny during a sale process and provide an opportunity to address any concerns before they become an obstacle to a transaction.

A People Audit will typically consider areas such as:

• Employment contracts and service agreements
• Staff handbooks and workplace policies
• Organisational structure and reporting lines
• Employment law compliance
• Holiday and absence management
• Performance management procedures
• Flexible working arrangements
• Restrictive covenants and confidentiality obligations
• Workforce retention risks
• Ongoing disputes, grievances or disciplinary matters

In short, it provides a clear picture of how effectively the people side of the business is managed.

Buyers look beyond the numbers

Strong financial performance will always be important, but buyers are increasingly focused on the sustainability of a business after completion.

They want confidence that the organisation is well managed, compliant and capable of continuing to operate successfully once ownership changes.

During due diligence, buyers commonly ask questions such as:

• Are employment contracts in place for all staff?
• Are key individuals protected by appropriate restrictive covenants?
• Are there any ongoing employee disputes?
• Is there a risk of employment tribunal claims?
• Are HR policies up to date?
• Is the business compliant with employment legislation?

Where clear answers and supporting documentation are available, the process is generally smoother. Where they are not, concerns can arise very quickly.

In many businesses, the people are the assets

For service-based businesses in particular, the value of the organisation often lies far beyond its balance sheet.

Clients may have long-standing relationships with key individuals. Specialist knowledge may sit with experienced employees. Reputation, expertise and customer loyalty are frequently built through the people who deliver the service rather than physical assets owned by the business.

A buyer will therefore want to understand not only who those key individuals are, but also how well the business is positioned to retain them.

Questions may include:

• Is the business overly reliant on one or two individuals?
• Are key employees protected by appropriate contractual arrangements?
• Is there a succession plan in place?
• How likely are employees to remain following a change in ownership?
• Is knowledge shared across the organisation or concentrated with certain people?

Where a business can demonstrate strong leadership, clear management structures and effective people processes, buyers are often given greater confidence that success can continue beyond the current ownership team.

In many service-led organisations, the workforce is not simply a cost of doing business. It is one of the most valuable assets being acquired.

Hidden HR issues can create unexpected risk

Many businesses are surprised by the issues that emerge during due diligence.

Examples can include:

• Missing or outdated employment contracts
• Inconsistent terms and conditions across the workforce
• Lack of contractual protection for customer relationships or confidential information and intellectual property
• Informal arrangements that have never been documented
• Historical disciplinary or grievance matters
• Unclear management responsibilities
• Gaps in employment law compliance

Individually, these issues may seem relatively minor. However, when viewed collectively by a prospective buyer, they can create uncertainty and raise questions about the overall governance of the business.

The result may be additional enquiries, requests for warranties or indemnities, or a reassessment of the risk profile of the acquisition.

Key people often represent key value

For many owner-managed businesses, success depends heavily on certain individuals.

Whether it is a senior management team, technical specialists or long-serving employees with valuable client relationships, buyers will want to understand how dependent the business is on particular people.

A People Audit can help identify:

• Succession planning gaps
• Retention risks
• Over-reliance on key individuals
• Business continuity concerns
• Management development opportunities

Addressing these issues before a sale process begins can provide reassurance to buyers and demonstrate that the business is not dependent on a single individual to maintain its success.

Good HR management reflects good business management

The quality of a company’s people processes often provides an insight into how the wider business is run.

Well-maintained employment records, clear procedures and effective management practices demonstrate organisation, attention to detail and strong governance.

Conversely, inconsistent documentation and poorly managed processes may lead a buyer to question what other issues could exist elsewhere within the business.

A well-prepared People Audit helps show that the organisation has invested in its foundations and is ready for scrutiny.

The best time to prepare is before a buyer appears

One of the most common mistakes business owners make is waiting until a sale is on the horizon before reviewing their HR arrangements.

The reality is that meaningful improvements take time.

Contracts may need updating. Policies may require review. Management structures may need strengthening. Potential risks may need to be addressed.

Undertaking a People Audit months, or even years, before an intended sale allows those improvements to be implemented properly and avoids the pressure of dealing with issues during a live transaction.

Businesses that prepare early are often better positioned to present a well-governed, well-managed organisation when a buyer comes knocking.

A valuable part of exit planning

Preparing a business for sale is about far more than achieving strong financial performance. Buyers want confidence in every aspect of the organisation, and that includes the way people are managed.

For many businesses, particularly those operating in professional and service sectors, the people themselves are a significant part of the value being acquired. A People Audit enables business owners to identify risks, strengthen governance and present a business that is well-managed, well-documented and ready for scrutiny.

It can help streamline due diligence, improve buyer confidence and reduce the likelihood of unexpected obstacles emerging at a critical stage of the transaction process.

Selling a business is often a once-in-a-lifetime event. Taking the time to understand how your people, processes and HR arrangements may be viewed by a prospective buyer can help put your business in the strongest possible position and maximise the value of everything you have worked so hard to build.

Thinking about selling your business?

A buyer’s due diligence process won’t just focus on your finances. They’ll want confidence in your people, processes and HR practices too.

A proactive People Audit can help identify issues before they become obstacles, giving you the opportunity to strengthen your business, reduce risk and approach a sale with confidence.

To find out more, contact Anthony Willis, Senior Associate in our Employment team AnthonyW@bhplaw.co.uk or Luke Philpott, Partner in our Corporate team, LukePhilpott@bhplaw.co.uk.

When it comes to selling your business, preparation doesn’t just protect value. It helps create it.