The first principle of the book, Lessons From Private Equity Any Company Can Use is “define the full potential of your company.” As an investor’s objective is increasing the value of the organization (and therefore the equity of their investment) thorough due diligence is critical to reaching an understanding of what exactly is being purchased and what prudent mitigation strategies are required if the deal is closed.
The human capital side of the investment equation has traditionally received less emphasis during the due dilligence process, except for quantative analysis of benefit plans, pension obligations, and salary costs.
I believe that determining the full value of any investment benefits from a review of the organization’s talent pipeline, ability to access external talent, potential flight risks; and leadership team gaps that could swiftly erode an organizations’ ability execute against their strategic objectives, and current human capital performance such as turnover rates, staffing metrics, employee engagement indicators, and who and when ot offer retention, development, or separation agreements.
I spoke to the Executive Director of a large angel investing organization recently and he told me that in his experience early stage companies rarely failed due to poor technology or financing, but rather a leadership team whose talent, knowledge, and execution gaps doomed it’s ability to scale to the next milestone.
Where does qualitative human capital due diligence fit within your valuation process?