PE Due Diligence Programme — Lesson 4 of 10
Of all the intangible assets you assess in PE diligence, human capital is the one that can walk out the door. Patents stay on the register. Customer contracts remain in force. Brand equity persists in the market. But the key engineer, the rainmaker sales director, the operations leader who holds the entire supply chain together — they can hand in their notice the day after completion and there is remarkably little you can do about it.
I have seen more PE deals damaged by talent attrition than by any other single factor. Not because the diligence teams missed obvious problems, but because they did not ask the right questions with sufficient rigour. A reference call with the CEO is not talent diligence. A quick review of employment contracts is not retention assessment. Proper human capital diligence is systematic, quantitative, and uncomfortable — because the findings often challenge the investment thesis.
Human capital diligence must move beyond "management assessment" to systematic evaluation of key person dependencies, knowledge concentration, retention mechanisms, and cultural resilience. In knowledge-intensive businesses, 30-60% of enterprise value is directly attributable to the people — and unlike other intangible assets, people cannot be locked in through legal ownership. The only protections are economic incentives, contractual mechanisms, and a culture worth staying for.
The Key Person Problem
Key person dependency exists when one or a small number of individuals hold a disproportionate share of the company's revenue relationships, technical knowledge, strategic vision, or operational capability. Every business has some degree of key person risk — the question is whether it is identified, measured, and mitigated.
The Key Person Assessment Matrix
For each individual identified as potentially key, assess across four dimensions:
Key Person Risk Assessment
| Dimension | Questions | Scoring |
|---|---|---|
| Revenue dependency | What percentage of revenue is directly tied to this person's relationships or sales activity? | >30% = Critical; 15-30% = High; 5-15% = Moderate |
| Knowledge monopoly | Does this person hold unique technical, operational, or strategic knowledge that no one else in the organisation possesses? | Sole holder = Critical; One backup = High; Documented + trained = Low |
| Replaceability | How long would it take to recruit and onboard a replacement of equivalent capability? Could one be found at all? | >12 months = Critical; 6-12 months = High; <6 months = Moderate |
| Retention likelihood | What is the realistic probability this person stays for 2+ years post-deal? Consider financial incentives, cultural fit with new ownership, and personal motivations. | <50% = Critical; 50-75% = High; >75% = Moderate |
A PE fund acquired a specialist engineering consultancy for 7x EBITDA. The founder — who had built the business over 20 years — held personal relationships with 8 of the top 10 clients, who collectively represented 65% of revenue. The deal included a 2-year earn-out to retain the founder. He stayed for the minimum period, then left. Within 18 months, five of the eight clients had reduced their engagement or moved to competitors. The fund's return on the deal was negative. The key person risk was visible in diligence — what was missing was a realistic assessment of whether the earn-out was sufficient to retain the relationships long enough to transfer them.
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