Cross-border mergers and acquisitions (M&As) offer significant opportunities for small to midsize enterprises (SMEs) looking to accelerate global growth. However, capturing these opportunities requires meticulous preparation, especially concerning employee integration and operational readiness. When I work with clients to guide international M&A projects, one of the points that I most frequently emphasize is how critical it is to address two distinct yet interconnected aspects of the deal process to achieve operational readiness on Day 1.
- Human capital due diligence: This entails managing the transfer of employees—arguably the most valuable company asset—quickly and compliantly from the seller to the buyer.
- Local compliance in-country: Ensuring that the acquiring company is fully compliant and capable of legally operating immediately post-acquisition is critical to operational readiness on Day 1.
Let’s examine each of these critical areas separately to highlight their importance and best practices.
Human Capital Due Diligence: Getting Employee Transfers Right
In every cross-border M&A, workforce complexities inevitably arise. Human capital due diligence refers explicitly to the process of ensuring seamless and legally compliant transitions for employees from the selling organization to the acquiring company. Given the value of employees as assets to the acquiring company, the success of this part of the process has profound implications for deal success or failure.
Employee Classification: Avoid Costly Surprises
One common oversight centers around employee misclassification. In this scenario, sellers may categorize workers as independent contractors instead of employees. This seemingly minor miscategorization can cascade into significant legal complications, tax obligations, and employment law liabilities across multiple jurisdictions post acquisition—all of which hinder operational readiness.
I’ve frequently encountered situations where what appeared to be a simple contractor arrangement was, in reality, a fully-fledged employment relationship—especially common in technology and consulting sectors. If discovered too late, correcting these issues can drastically increase costs and lead to operational disruptions.
Remote Workforce Challenges
Another complexity lies with digital nomads (remote workers)—an increasingly commonplace occurrence post-pandemic. It’s not unusual for employees to be officially employed in one country yet reside or work from another jurisdiction entirely, unbeknownst to their employer. Without adequate due diligence, acquiring companies risk inheriting the unrecognized legal responsibilities and unexpected tax implications of these digital nomads that may affect both the deal’s profitability and operational readiness.
Best Practices for Human Capital Due Diligence:
- Identify and verify employee locations, classifications, and the terms and conditions of their contract terms early in the M&A process.
- Engage experienced HR and legal advisors familiar with the local employment regulations and practices.
- Develop comprehensive integration strategies that explicitly address how employees will transition into your business model, including new employment agreements compliant with local labor laws.
Operational Readiness: Achieving Immediate Compliance and Functionality
While human capital due diligence focuses on smoothly transitioning employees, Operational Readiness addresses ensuring the acquired entity is legally prepared and fully functional from Day 1 post-acquisition. Operational Readiness involves tasks such as entity incorporation, obtaining necessary business licenses, opening bank accounts, and setting up compliance with local tax and regulatory requirements.
Local Compliance in M&As: More Than a Checkbox
Operational compliance isn’t just about legal formalities—it’s about ensuring that your newly acquired business can legally operate in-country across all aspects of business operations, from paying employees through an established bank account to paying rent for your building or transacting with local vendors.
Understanding Country-specific Complexities
Each country brings its own distinct (and changing) operational compliance requirements, ranging from complex tax registration processes to strict corporate governance standards. For instance, in countries like Germany, businesses must navigate nuanced regulations involving works councils which have co-determination rights giving them power to block the transfer from closing if they are not satisfied with the agreement.
Similarly, jurisdictions such as France often present specific challenges regarding their very strict laws on employee benefits and termination procedures, necessitating detailed preparation far ahead of the actual acquisition.
M&A Best Practices for Local Compliance:
- Start local compliance preparations early, before the acquisition closes.
- Consult with experienced legal, HR, and accounting specialists who can guide you through complex local regulatory landscapes and help you avoid costly mistakes.
- Set up a clear operational checklist for every country in which you’ll operate, including incorporation timelines, bank accounts, KYC (Know Your Customer), tax and HR registrations, business licenses, resident representation, and other compliance reporting obligations.
Partner with a Trusted Cross-border Expert to Achieve Operational Readiness on Day 1
Both human capital due diligence and local compliance are integral to operational readiness post-acquisition. Overlooking either component risks significant delays, unexpected costs, and even legal liabilities. Thus, the path to successful cross-border M&A isn’t simply completing the deal but creating a fully operational entity capable of achieving its strategic objectives without interruption, on Day 1.
HSP leverages decades of experience supporting SMEs in successful global expansions through successful M&A transactions. Our legal, financial, and HR experts can help you navigate the nuanced legal, regulatory, and operational challenges that define cross-border transactions.
We understand the stakes involved in global expansion and recognize that the process doesn’t end when the deal closes—it ends when your business is able to successfully begin operating as a local legal, compliant entity.
If your organization is considering a cross-border transaction, let our experts quarterback your post-acquisition due diligence and help you navigate the local complexities confidently to help you achieve a smooth and efficient M&A transaction.
How HSP Helps You Navigate Cross-Border M&A with Confidence
HSP is an end-to-end global expansion solutions provider focused on helping companies scale their operations overseas effectively and efficiently. We are the only global expansion expert to offer growing companies a full suite of end-to-end solutions designed to help them scale to any size and country.
Our in-country experts have delivered the full spectrum of global expansion solutions—from EoR to entity set-up and management—across more than 100 countries (and counting). HSP brings full payroll, accounting, tax, legal, compliance, and HR services to corporate teams, integrating with in-house staff to both guide and execute across every domain.
Contact us to discover how our full suite of global hr services can help your company successfully expand overseas in any environment.
