Mergers and Acquisitions Due Diligence For Private Equity Firms

​Using an independent consultant to conduct the risk management due diligence is an important part of the merger and acquisition process.  

SandRun Risk is not an insurance broker and is not in the business of selling insurance products. Thus there are no conflicts of interest in our analysis and recommendations. We bring a razor-sharp analysis to the acquisition process in order to recommend measures that can be taken to help position the selling company to achieve maximum value, and to position the buying company to reduce risk and achieve maximum return on investment. 

For the Buyer:

1. It is important that the buying company fully identify the selling company’s historical and ongoing liabilities.  Those liabilities include environmental liabilities, D&O liabilities and other legacy exposures, including legal claims.  If hidden environmental liabilities materialize, or costs of known liability issues escalate after the deal, the value of the acquisition to the buying company can be significantly decreased. 
   
2. In many mergers and acquisitions, the buying company absorbs the liabilities of the selling company.  If the selling company has grown by acquisition through the years, understanding and evaluating all of the successor liabilities is key.  If the successor liabilities are not identified and evaluated, they may create latent issues for the buying company and may create problems that were not addressed in the purchase price and the sale agreement.
   
3. Understanding the selling company’s insurance policy self-insured retentions and deductible obligations, reserves, and collateral requirements is important.  Determine whether the selling company’s policies were written on a “claims-made” form or on an “occurrence” form. 
   
4. Ask if there are any future liabilities of the selling company that may arise from products that the selling company currently and formerly sold.  Determine whether new insurance coverages should be purchased or schedules to buyer’s existing property insurance policies should be updated.
   
5. Insurance products available to assist in the risk transfer process include:  (1) representation and warranty insurance; (2) contingent risk insurance; (3) tax liability insurance.

For the Seller:

1. Evaluating current risk management program including all risks and develop ways to package those as part of the transaction.
   
2. Determine the seller’s potential uninsured liabilities following a careful review of the seller’s insurance policies and claims history.
   
3. Document and chart the seller’s current and historic insurance policies to ensure the key risks are covered, the primary and excess limits are adequate and unimpaired from other claims, and the insurers are solvent.
   
4. Review the seller’s key contracts for risk transfer provisions that may have promised indemnification or conferred additional insured status on the seller’s suppliers, customers, or past or present corporate affiliates. 
   
5. Ensure that all claims and circumstances that may give rise to claims potentially covered by the seller’s policies are reported to the seller’s insurers before the deal closes.
   
6. Compile the seller’s corporate history. 

 SandRun Risk can assist both buyers and sellers in the acquisition/divestiture process. Please contact us if you have any questions.