Cybersecurity risks are not always obvious. While buyers have become more attuned to the major risks, data breaches, ransomware attacks, and weak passwords, there are often hidden vulnerabilities lurking beneath the surface. To better understand these hidden threats and how they can impact staffing M&A, I sat down again with Mike Glover, an expert in cybersecurity for M&A, and Krisann McDonnell, a leading M&A and security expert at Charter.

Brian Kennedy: Mike, we’ve discussed the major cybersecurity risks, but what about the hidden ones that buyers should be looking for?

Mike Glover: “Hidden risks are often the ones that derail a deal when it’s too late to address them. For example, something as simple as outdated software can be a huge vulnerability. Many staffing firms still use legacy systems like applicant tracking systems (ATS) or payroll software that lack the necessary security patches and updates. These systems might have been good when they were first installed, but as they age, the vulnerabilities multiply.”

Brian: So, an old ATS or payroll system can actually be a dealbreaker?

Mike: “Absolutely. A buyer may look at a firm and see a lot of business value, but when they dive into the IT infrastructure, they often find outdated systems that aren’t equipped to handle modern cybersecurity threats. That’s a major risk. If a buyer discovers that a staffing firm’s IT system is exposed to vulnerabilities because of old software, it could be a dealbreaker. They might not want to take on the risk of having to upgrade or replace critical systems, especially if it’s a large, complex transition.”

Brian: Krisann, are there any other hidden cybersecurity risks you see often overlooked during the due diligence process?

Krisann McDonnell: “Yes, there are several. One major one is third-party vendor risk. Staffing firms work with many vendors, payroll providers, background check companies, CRM systems, and sometimes these third parties don’t have the same level of security controls. If the vendor’s systems aren’t secure, the breach could extend to your firm, even if your internal systems are top-notch.”

Brian: So a third-party vendor could be the weak link in the chain?

Krisann: “Exactly. It’s not just about what’s inside your own organization, it’s about the whole ecosystem. If a staffing firm’s third-party vendors have weak security practices, it can put the buyer at risk. A buyer needs to understand where and how sensitive data is being handled throughout the entire supply chain.”

Brian: How do you uncover third-party risks during the due diligence process?

Krisann: “You need to review contracts and policies with third-party vendors. Is there a clear cybersecurity clause in the contract? Does the vendor follow industry standards? Do they conduct their own cybersecurity audits? Buyers should ask these questions to ensure they’re not inheriting a problem.”

Brian: Another hidden risk you’ve mentioned in the past is shadow IT. Can you explain how this can impact an M&A deal?

Mike: “Shadow IT refers to the unauthorized use of technology within an organization, essentially, employees using software or devices that the IT department hasn’t approved or monitored. For example, employees might use personal cloud storage solutions to store work-related data because it’s easier or more convenient. They might not even realize the risks they’re introducing by doing this. The problem is that when an acquisition is happening, shadow IT can fly under the radar and potentially expose the firm to vulnerabilities.”

Brian: So, employees using unauthorized applications could create unseen risks that a buyer wouldn’t catch unless they do a deep dive?

Mike: “Exactly. These risks are tough to identify unless you take the time to fully assess the IT environment, including unauthorized devices and apps that employees use. If these systems are not properly secured, they can be a backdoor for hackers. And a buyer might not catch it unless they have a comprehensive audit in place.”

Brian: So, what can staffing firms do to address these hidden risks before they enter the M&A market?

Krisann: “A good place to start is by conducting a comprehensive cybersecurity audit. Look for outdated systems, shadow IT, and third-party vendor risks. Perform internal penetration testing to see where vulnerabilities exist. And don’t forget to assess any past incidents or breaches, even if they were resolved years ago. Any history of a breach should be fully disclosed to the buyer to avoid trust issues.”

Mike: “Exactly. And once you’ve identified these risks, make sure they’re properly addressed. For example, if there’s outdated software, upgrade it. If there’s shadow IT, bring those tools under control. Be transparent about past breaches and take steps to demonstrate that they’ve been mitigated. The goal is to show the buyer that you’ve taken a proactive approach to security, which can really boost buyer confidence.”

Brian: Let’s talk about the most important thing here, how hidden cybersecurity risks impact valuation.

Mike: “Hidden risks can lower the valuation of a firm drastically. If buyers find vulnerabilities during due diligence, they’ll factor that into the price. They may require a discount or request more significant holdbacks to protect themselves in case the vulnerabilities result in a breach down the road.”

Krisann: “In some cases, if the risks are high enough, the buyer might pull out of the deal entirely. I’ve seen deals where buyers started off interested but ultimately walked away once they understood the scope of hidden risks. Buyers aren’t willing to gamble with their investment. The more hidden risks there are, the less attractive the deal becomes.”

Brian: So, for staffing firms thinking about selling, what steps can they take now to uncover and fix these hidden risks?

Mike: “It’s all about being proactive. Don’t wait for the buyer to uncover issues. Start by doing your own audit and fix any issues you find. Bring in outside experts to help if necessary. Address outdated software, clean up shadow IT, and make sure your vendors are up to standard. The earlier you tackle these issues, the less risk there will be in the deal process.”

Krisann: “And one more thing, be transparent. Buyers appreciate a seller who’s honest about any past security incidents or ongoing risks. If you’re upfront about these issues and show that you’ve taken steps to mitigate them, it will build trust and go a long way in protecting your valuation.”

Brian: Great insights. Any final thoughts for staffing firms looking to enter the M&A market?

Mike: “The key takeaway is to prepare early. Cybersecurity isn’t something you can rush. It’s an ongoing effort, and firms that take a proactive, comprehensive approach will not only protect themselves but also boost their market value.”

Krisann: “Absolutely. Addressing cybersecurity early isn’t just about risk mitigation, it’s about building trust, confidence, and a stronger position in negotiations. The firms that do this right will have a distinct advantage when they’re ready to sell.”

Take Action Now.

If you’re considering selling your staffing firm, don’t let cybersecurity be the reason you lose value or delay your deal. The risks you overlook today could be the very reason your deal falls apart tomorrow.

As someone who specializes in selling staffing companies, I can tell you that the firms that address cybersecurity issues upfront are the ones more likely to get top dollar. It’s a marketable characteristic of your enterprise. If you want to make your business as attractive as possible to buyers, it’s crucial to address any cybersecurity vulnerabilities now.

Charter can make that process easier. They offer confidential cybersecurity assessments that help firms identify weaknesses, improve their digital hygiene, and ensure they’re ready for a successful transaction.

No cost. No pressure. Just real insights.

Schedule a complimentary, confidential consultation with Charter today: [kmcdonnell@charter.ca]

You can also ask us your M&A  questions: brian@racohenconsulting.com and be sure to check our Resources Library out here: https://racohenconsulting.com/library

Your business value depends on it.

In the next article, we’ll look at how to successfully integrate cybersecurity after an acquisition and ensure a smooth transition.