The Dovetail: Acquisition Due Diligence: Are These Items on Your List?

Acquisition Due Diligence
By Lindsey DiGangi

When considering making an acquisition as a business owner, it’s critical that they have a full understanding of their target company. Risk is an inherent part of the deal, but have they considered them all? With our position in the industry, insuring many businesses who have made acquisitions, these are a few items we encourage you to share with your clients to add to their due diligence list:

1. The location of the target: This may be the first item on their list. But have they considered the implication of that location on their insurance program? Many acquisitions occur in the areas where the population is growing, and population is growing in areas that are more prone to natural disasters. However, in reality, no location is immune to weather-related risks. Weather patterns are changing, and many locations are at risk of more frequent and more severe weather events. Insurance in higher-prone locations can be more difficult to place and may come with higher rates and tighter terms and conditions.

More than weather-related risks, they should also consider the legal environment of the target location. If it’s different than their own, do they understand the nuances of that location? Judicial hell holes exist across the country, increasing the risk for businesses to operate there. Excessive lawsuits and outsized damage awards can make claims in these areas take longer to handle and litigation can be costly.

2. Contractual Controls of the target: Understand the target’s approach to contracts. Are contracts standardized? Has the contract template been reviewed by a lawyer? Do all vendors and partners have current up-to-date contracts in place? Are certificates of insurance requested? Has the target been named as an additional insured by contractors or subcontractors? Many liability claims come long after work has been completed. These standing obligations can have a long-tail impact on your clients, should they assume liabilities as a part of the acquisition terms.
3. Prior claims of the target: Spend time with the prior claims of your target. Are these claims fortuitous or are there patterns to the losses they have experienced? Trends or patterns may be indicators of processes and practices that need to be reconsidered, employees that need additional training, or a culture that may not be risk-aware. Are your clients willing to take on these challenges? Because your future claims can impact their insurance program.
4. The insurance program of the target: Your clients may already be looking at a their target’s insurance costs as a part of their due diligence, but are they looking at the whole package? A review of price alone does not provide the full story. It’s critical to review the insurance program as a whole in relation to their own. Is the company insuring their entire business, including properties, general liability, and auto? Does the valuation of their insurance match their own? How about the deductibles? Do they have business income insurance? It’s only after reviewing these questions that they can determine if that cost of insurance is a good indicator of future costs.

Mergers and acquisitions can create unparalleled opportunity for businesses. However, they can also expose them to more risk. Understanding one’s personal and business risk tolerances can help them decide if their target is a reward that’s worth the risk.

For any questions, please do not hesitate to reach out to your business development representative, found here, or contact me directly at ldigangi@plmins.com or 267-825-9034.