People and Organization Due Diligence

Executive summary

People and organization due diligence is the review of who runs the business, who the business depends on, what the workforce really costs at run-rate, and how likely it is that the people the plan needs will still be there and still be motivated twelve months after close. It is the part of diligence most often compressed into a management presentation and a one-page org chart, and it is where a surprising share of post-deal disappointment begins.

The method here has four parts. First, understand the structure: layers, spans of control, who reports to whom, and what is outsourced. Second, price the payroll at run-rate rather than at last year's cost. Third, identify the key people and the ways they could leave. Fourth, test the management team against the job the next owner needs done. Each finding should land as a price adjustment, a one-time cost, a run-rate change, or a condition in the purchase agreement.

One boundary needs to be stated plainly. Employment law, wage and hour compliance, benefits plan compliance, immigration, works councils, union agreements, severance entitlements and similar matters are legal and HR questions. This guide helps you decide what to ask and how to size the commercial effect. It does not give legal advice. Involve employment counsel and qualified HR advisers before relying on any conclusion in these areas, and follow the target's own employment and benefit agreements as they are written.

This guide is part of the due diligence hub. It pairs with financial due diligence, which covers payroll as an accounting subject, and with the management team assessment guide, which goes deeper on leaders after close.

When to use this

Use this guide when:

• The target is a founder-led business and the founder's role in selling, pricing or key relationships is unclear.
• The thesis depends on a management team that will stay, grow or be replaced.
• Labor is a large share of cost, or the business depends on scarce skills (technicians, engineers, licensed professionals, sales specialists).
• The seller has recently made, or is about to make, compensation changes, hires or departures that affect run-rate cost.
• You plan to integrate the target with another business and need to know what cultural and organizational fit looks like.
• You want to price retention before signing rather than discovering it after close.

For a small add-on, use the add-on acquisition screening scorecard first and apply this guide to the targets that pass.

Diagnostic questions

Use these in a first management session and in the data request. Differences between what leaders say and what the data shows are findings.

1. Provide an organization chart showing every role by name, title, manager, location, hire date, employment type (employee, contractor, agency) and annual compensation.
2. What is the headcount at the start and end of each of the last three years, with hires, departures and reasons for leaving?
3. Who are the ten people the business cannot run without, and what would happen in the first 30, 90 and 180 days if each left?
4. Which of those people have written employment agreements, non-competition or non-solicitation terms, bonus plans, equity or phantom equity, and what happens to each on a change of control?
5. How is compensation set, how recently was it reviewed, and where do the key roles sit against the market for the role?
6. How much of annual compensation is variable (bonus, commission, incentive), what is the plan formula, and is the current accrual in line with expected payout?
7. Which roles are filled by family members or friends of the owner, and are they paid at the market rate for the work they do?
8. What is the structure of the sales and customer-facing team, and who owns each of the top 20 customer relationships by name?
9. How many layers sit between the CEO and the front line, and what are the spans of control at each layer?
10. What share of work is done by contractors, agencies or outside providers, and what are the terms and tenure?
11. What are the open roles, how long have they been open, and what is the cost of filling them at current market rates?
12. What employee relations matters, claims, investigations, union or collective arrangements, or regulatory inspections have occurred in the last three years? (Counsel to review the answers.)

Framework: five people lenses

Lens 1: Structure and spans of control

Begin with the chart and test it against reality. A chart shows who is supposed to report to whom. The payroll roster shows who is actually paid, and where. Reconcile the two. Differences (people on payroll who are not on the chart, roles that exist on the chart but are vacant) are a finding about how well leadership knows its own organization.

Then measure spans and layers. Span of control is the number of direct reports per manager. Very narrow spans across several layers often indicate management cost that can be reduced after close. Very wide spans at a layer that does complex work often indicate under-managed teams, which shows up as errors, turnover or a few heroic individuals. The span of control cost analysis guide shows how to compute the cost of layers, and the same method works as a diligence screen. Use it as a question generator rather than a verdict, since the right span depends on the work.

Lens 2: Payroll at run-rate

Historical payroll is not the payroll the buyer will own. Compute run-rate people cost from the current roster. Start from the roster with current annual pay, then adjust for items that did not hit the historical period:

• Raises granted late in the period or scheduled for after close.
• Open roles that the plan assumes will be filled, at market pay, plus recruiting cost.
• Under-accrued bonuses, commissions or profit sharing, where the accrual is below the expected payout.
• Owner or family compensation that is above or below the market rate for the role, which the quality of earnings may normalize, as discussed in the quality of earnings guide.
• Contractors who function as employees and might need to be converted, or temporary staff used to avoid headcount. Classification questions are for counsel.
• Benefits cost changes, such as renewal rate increases on health plans.
• Retention bonuses or transaction bonuses that are triggered by the sale. These are typically one-time and may be a seller cost or a buyer cost depending on the agreement.

The output is a bridge from last-twelve-month people cost to run-rate people cost. Each step in the bridge is either a run-rate adjustment to EBITDA or a one-time item, and the distinction matters for price.

Lens 3: Key people and retention

Identify key people by function rather than title. Ask: who owns the top customer relationships, who holds the technical knowledge nobody else has, who is the only one who can quote, schedule or approve, and who is the founder's informal second in command? For each, record tenure, pay against the market for the role, agreements in place, what they gain or lose in the sale, and whether they have been told about it.

A person who receives a large payout at close and has no reason to stay afterward is a different risk from a person whose compensation is below market and who has not been told about the deal. Retention is rarely only about money, but retention arrangements are one of the standard tools. Their design, tax treatment and enforceability are for counsel and tax advisers. What the operator does is size the cost and decide who needs a conversation before signing.

The seller's role deserves separate attention. If the founder is the main salesperson or the key technical authority, the plan for the transition (length of any consulting or employment period, handover of customers, non-compete terms drafted by counsel) is a core deal term, not an afterthought.

Lens 4: Management capability

Assess the management team against the next owner's plan, not against what the business did last year. A team that ran a stable $20M business well may not be the team to run an acquisition program or a doubling of volume. Ask what each leader has done that resembles what the plan now requires, how decisions are made, and what happens when the leader is absent.

Lens 5: Culture and integration fit

For a deeper method after close, see the management team assessment guide. Culture sounds soft, but it has hard indicators: turnover by function and tenure, length of time roles stay open, internal promotions versus external hires, how disagreements get resolved, and whether the team talks about customers or about the owner. Ask for any engagement survey the company has run, and look at what was done with the results.

Step-by-step process

1. State what the plan needs from people. List the people-related assumptions (headcount flat, a new sales leader, a founder who stays 12 months, a plant manager who can run two shifts). Owner: deal lead. Output: one-page people hypotheses.
2. Request the roster and agreements. Ask for the roster with pay, org chart, agreements for key people, bonus plans, headcount history and open roles. Owner: diligence lead with HR adviser. Output: request list and received data.
3. Reconcile the roster to payroll and to the org chart. Differences are findings. Owner: finance analyst. Output: reconciled roster.
4. Build the run-rate people cost bridge. From LTM payroll to run-rate, with each adjustment typed as run-rate or one-time. Owner: finance analyst. Output: bridge and the effect on EBITDA.
5. Identify the key people list. Use the diagnostic questions and ask the CEO and the top team. Owner: operating partner. Output: key-role list with tenure, pay position and agreements.
6. Hold management interviews. Same questions for each leader; separate sessions. Owner: operating partner. Output: assessment notes by role.
7. Engage counsel and HR advisers. Send employment terms, agreements, classification questions, benefits plans, and any claims to employment counsel. Owner: deal lead. Output: counsel's view of risks and conditions.
8. Design retention and transition. Decide who needs a retention conversation before signing, what it will cost, and what the founder transition looks like. Owner: deal lead with counsel. Output: retention plan and cost.
9. Type and price findings. Price, one-time, run-rate or condition. Owner: deal lead with finance. Output: findings register.
10. Hand over to integration. The first-100-day people plan, with named owners. Owner: integration lead. Output: plan linked to the PMI playbook.

Templates

Roster reconciliation (copy into a spreadsheet)

Run-rate people cost bridge

Key-role register

Metrics and KPIs

Setting targets without invented benchmarks. Compare each metric to the target's own three-year trend, to the pay and span structure of your other portfolio companies measured the same way, and to disclosures from named listed peers where available. Do not apply a turnover or revenue-per-head figure from a survey to a business with a different mix of work. A distributor, a machine shop and a services firm will not share one number.

Common mistakes

1. Valuing the payroll at last year's cost. The buyer owns the current roster, the open roles and the bonus obligations, not the historical average.
2. Relying on the org chart. Charts show intent. Reconcile to payroll.
3. Treating the founder as a normal employee. If the founder carries relationships or knowledge, the transition is a core deal term.
4. Asking about retention only after signing. The cheapest time to speak to key people is in the confirmatory period, within the confidentiality terms and with counsel.
5. Confusing contractors with a cost advantage. Worker classification is a legal question. Do not bank the saving until counsel has reviewed it.
6. Forgetting the sold-business bonus. Change-of-control and transaction bonuses can be large and are often misplaced in the price conversation.
7. Making legal conclusions. Employment, benefits, classification and union questions go to counsel and HR advisers.

Worked example

Illustrative. The numbers below are invented to show the method. They are not benchmarks.

A target reports LTM payroll cost of $8.40M and seller-adjusted EBITDA of $6.00M. The buyer builds the run-rate bridge.

The arithmetic: the roster annualizes to $8.65M, which is $0.25M above LTM. Adding $0.38M for open roles (4 × $95,000) gives run-rate payroll of $9.03M, which is $0.63M above LTM. Adding the $0.22M variable pay gap brings the total run-rate increase to $0.85M.

Effect on EBITDA: $6.00M − $0.85M = $5.15M, a reduction of 14.2%. If the buyer is paying a multiple of EBITDA, the multiple applies to the lower figure. The one-time retention pool of $0.18M does not change EBITDA but is a cash cost to fund at close, and it is a candidate for negotiation between buyer and seller.

Open questions the register carries to counsel and HR: whether the two mid-year hires have guaranteed terms, whether the bonus plan documents contain a change-of-control provision, and whether three contractors are correctly classified. The deal team does not answer these. It lists them and sizes the exposure range so counsel's findings can be priced when they arrive.

AI prompt assistance

AI can help organize roster data and draft interview guides. It cannot judge people or interpret employment law. Provide the data yourself and check the output against the source documents.

1. Reconcile the roster.

I will paste a payroll register and an org chart roster. List people who appear in one but not the other. Compute headcount and total annualized pay by function for each source and show the differences. Do not guess names that do not match; list them as unmatched.

Check: review every unmatched name manually with HR; confirm the totals tie to the payroll register.

2. Build the run-rate bridge.

Given LTM payroll of [amount], an annualized roster total of [amount], [N] open roles at [cost] each, and a bonus plan with expected payout [amount] and accrual [amount], compute the run-rate people cost and the effect on EBITDA of [amount]. Show each step and label which items are run-rate and which are one-time.

Check: recompute by hand and confirm each input against its source document.

Implementation guide

Governance: the deal lead owns the register until close and the CEO owns it afterward. Report key-role retention and run-rate cost to the board or investment committee monthly for the first six months.

Downloadable assets

The roster reconciliation, run-rate bridge, key-role register, interview guide and span screen above are designed to be copied into a spreadsheet. For the working capital side of the same transaction, see the working capital peg estimator.

Related resources

• Due diligence hub: the full set of diligence guides.
• Management team assessment: first 90 days: assessing leaders after close.
• Span of control cost analysis: costing management layers.
• Quality of earnings report before you close: where compensation normalization belongs.
• PMI playbook: Day 1 to Day 365: culture and retention after close.

Frequently asked questions

What is people and organization due diligence?

People and organization due diligence is the review of a target's structure, payroll, key people, management team and culture to test whether the workforce can deliver the plan. Its main outputs are a run-rate people cost, a key-role register with retention actions, and findings that become price changes, costs or conditions in the purchase agreement.

What should an HR due diligence review include?

It should include an org chart reconciled to payroll, headcount and turnover history, key-person agreements and incentive plans, compensation against the role market, open roles, contractor use and any employee relations matters. Legal and compliance items such as classification, benefits plans and claims should be reviewed by employment counsel and qualified HR advisers.

How do you assess key person risk in an acquisition?

List the roles whose loss would stop or degrade the business within 30 days, then record each person's tenure, pay position, agreements, what they gain or lose in the sale and whether anyone could cover. Rank by impact and likelihood of leaving, then decide who needs a retention conversation before signing, with counsel designing the terms.

Why does run-rate payroll differ from LTM payroll?

Run-rate payroll reflects the roster the buyer will own, including raises granted late in the period, open roles the plan assumes will be filled, and bonuses that are under-accrued. LTM payroll reflects what was paid historically. The difference changes EBITDA, so each adjustment should be typed as run-rate or one-time.

How this works in a System of Performance

People findings go stale quickly if they sit in a diligence deck. Who is critical, who was spoken to, what was promised and what happened to each retention commitment are usually spread across email, spreadsheets and memory. A Performis routine can take on a recurring job like this, with the scope and fit agreed with you: it works from the records your team supplies, prepares the work for your named reviewer, and keeps each approval on record. If you want to see where your own organization depends on a few people, bring it to us as a launch partner.