Today’s headlines are filled with talk about inflation and rising prices. Although the recent Consumer Price Index reporting has showed a slight curve in trend, businesses will continue to deal with the balancing act of absorbing cost increases while retaining employees.

The cost of labor and benefits continues to rise, putting pressure on buyers to perform more in-depth reviews of these cost items pre-closing, and to have a thoughtful post-closing plan to tackle any issues found.

Health Insurance Market

Health insurance can provide employees compensation in the form of reducing out of pocket exposure when it comes to their healthcare needs and access to providers.

Health insurance typically accounts for one of the largest Profit & Loss (P&L) expenses for an employer outside of payroll. Typically, there is a cost share for this expense (the insurance premium) between the employees and the employer. Benchmark data from the Kaiser Family Foundation (KFF) stated that in 2025, the average employer share of this expense was 75%, leaving the employees with 25% percent of the premium responsibility deducted out of their payroll. Companies could argue that they are essentially compensating their employees by covering a larger percentage of their health benefits premium on top of what they pay them through payroll.

How Buyers can Adapt

Buyers should be cognizant of market trends when looking at a target during due diligence and include assumptions based on trends when developing proforma financials to gain a more accurate picture of the ongoing cost of insurance. To combat the trend, buyers can work with their benefits/risk adviser to analyze current benefit plan designs, costs and claims data (if available) during due diligence and determine options to control costs and flatten the curve.

A Few Options That Have Been Successful:

• Introduce self-insured plans or hybrid-funded plans (including HRA wrap plans) to reduce fixed costs while taking on some additional variable liability. Self-insuring a plan enables buyers to carve out prescription drug or disease management, giving employers more control over their costs.
• Educate employees on lower-cost provider options, such as telemedicine and virtual visits when appropriate. Additionally, direct primary care or a narrower provider network are available options. Advisers can determine the adequacy of such options through a provider disruption analysis. Any of these options directly impacts claims, thus mitigating the impact of trend.
• Education and engagement can also be used as a retention tool, specifically after an ownership transition, easing the integration process. Employees tend to respond well when given more education around their benefits, which reinforces a positive company culture.

The Role of Human Capital

Employees are the primary drivers of a business, but they are also a leading expense. Identifying key employees and understanding processes to hire, retain and ensure employees reach their potential are all imperative to successful transactions.

An evaluation of internal processes to assess benefits and compensation, as well as compliance, should be a consistent practice for businesses. The stress on businesses to provide competitive compensation and benefits packages to their employees persists and will continue to play a factor in keeping key employees and improving retention, specifically through a transition of ownership.

Human resources and human capital due diligence assess the value of a population or employee base of a target and will assist a buyer in identifying key employees as well as any red flags or shortcomings in terms of their processes. An HR advisory team can also review targets for discrimination or compliance issues among employees and identify employees who are pertinent to the business continuing on a consistent trajectory. Alternatively, an HR due diligence adviser can help a buyer identify areas where additional employees may be needed moving forward.

Buyers can also use an HR due diligence adviser to assist in creating a change management strategy during closing and post-closing planning. Change management involves communicating with groups of employees to ease the transition process and reduce anxieties employees may feel upon the completion of a transaction. During their post-closing planning, change management can be a great tool for buyers to use to obtain a consensus among employees on where meaningful improvements can be made.  This will increase the goodwill among employees.

This article was also featured on CrainsCleveland.com.