Source: LOHAS Weekly Newsletter
Published: Friday, December 01, 2000

NEW YORK—Have you ever had a potential acquisition or investment crater after it looked so good on paper, and you couldn’t understand why it didn’t close? Did you ever wonder, even after you closed a deal, if the company will come close to executing against its plan? Research shows that most corporate M&As fail to meet even reasonable return on investment objectives. Consider, of course, that people were the biggest factor in each of these equations.

Corporate acquirers and professional investors say that management, culture and organizational structure are of paramount importance in evaluating business opportunities. However, evaluations by most of them include an inadequate and less-than-thorough assessment of all the people who will impact the success or failure of the transaction, as well as the ongoing execution of the business plan.

One of the results of the human-potentials movement over the past 25 years is the emergence of a host of evaluation and facilitation tools that directly address the hidden processes that drive any given human endeavor. These processes have evolved into systematic and proven methods to evaluate an individual’s emotional intelligence, leadership potential and functional skills, as well as his participation in teamwork and group dynamics. All business environments are under the influence of these human factors.

Sophisticated venture capital and corporate acquirers have begun, with some success, to engage “human due diligence” (HDD) professionals to assess the health of organizations they view as prime business opportunities. By engaging a professional who has the skill and experience to apply these principles, you will gain the insurance you need to qualify your deals.

HDD can be used as a “diagnostic” tool to quickly and accurately assess people—both individually and collectively. The relative health of any organization is determined by the relative health of its individuals. If any of its individuals are significantly unhealthy or below par in the areas of emotional, psychological, physical or spiritual health, or possess mediocre business management skills, the organization will be a reflection of these unhealthy states. No amount of money thrown at an organization in this condition will change the probability of an unprofitable outcome. Where the company lands on the “healthy meter” has a significant and direct impact on its ability to achieve its goals.

All too often business opportunities, such as mergers, acquisitions or the introduction of venture capital, are evaluated almost exclusively on the following measures: operations, EBITDA, cash flow, sales growth, competition and market opportunities. As critical as these factors are, minimal consideration is given to also assessing the employees who are going to execute the plans.

Even though it’s common for investors to interview key executive management, they often lack the talent and skills to perform an effective evaluation. Additionally, the interviews usually stop at the executive-team level, while some of the most valuable information about the company can usually be gained by listening to middle management and other employees.

Given the dynamic nature of organizations, effective human assessments require the use of many methodologies simultaneously so the most influential factors can be revealed—no one variable can be isolated and labeled as the cause.

An integrated approach using a variety of assessment tools is what reveals the big picture. When investor groups and corporate acquirers begin to incorporate these processes to evaluate their potential investments, they will be better able to quickly make informed decisions on whether or not to go forward.

Certain natural-products-oriented venture capital investors have begun to use HDD to evaluate potential investments. Other investment banking firms are considering going through this process to evaluate their own state of internal health and use the results as a basis upon which to build a healthier and more progressive and powerful organization.

Janet DiGiovanna is founder of San Anselmo, Calif.-based Human Due Diligence (jdigiovanna@earthlink.net), and Chuck Slotkin is president of New York-based Nature’s Equity Inc. (neichuck@aol.com).