As more middle-market companies begin to consider an exit or divestiture, dealmakers are searching for new ways to better market a company. It’s estimated that 60 percent of full-time M&A advisors will spend 2018 on the sell side.
One opportunity to add value that is frequently overlooked is insurance risk management. Unresolved liabilities and exposures can trigger concerns among potential buyers and even become roadblocks if not addressed early. From the onset of sell-side due diligence – along with a quality of earnings review, projected business trends and customer assessments – a well-prepared deal team should conduct a quantitative risk analysis.
New analytical technology can now place precise present-day values on future liabilities. As part of the process, a seller can identify and close liability gaps, tighten operations and present a better, more transparent company for sale. This deeper level of information also enables sellers to resolve potential deal breakers before negotiations begin and prevents buyers from using trouble spots as additional leverage. Middle-market companies almost always carry unresolved liabilities and the quantitative risk analysis enables sellers to address those issues before they emerge during negotiations.
The quantitative risk analysis begins with an extensive audit into policy issues such as coverages, provisions, terms and conditions, limits of liability, self-insured retentions, policy periods, retroactive dates and exclusions. Items that frequently go unnoticed include exclusions. Items that frequently go unnoticed include and vendor agreements, supplier contracts, and environmental remediation and regulatory compliance issues.
Before a transaction, sellers can optimize their risk portfolio by restructuring policies and identifying efficiencies in insurance coverage and risk mitigation. During negotiations, the deal team can use the same information to promote cost take-outs after closing.
[ IT’S NOT UNCOMMON FOR A QUANTITATIVE RISK ANALYSIS TO UNCOVER OR RECALCULATE AN UNEXPECTED LIABILITY THAT COULD DISCOURAGE PROSPECTIVE BUYERS. OFTEN, SELLERS ARE AWARE OF CERTAIN EXPOSURES THAT HAVE PREVENTED BUYERS FROM TAKING A SERIOUS LOOK AND HAVE LONG SEARCHED FOR WAYS TO MOVE PAST THE PROBLEM. ]
In these cases, a new structure of property and casualty mergers, acquisitions and divestitures. It’s called deal facilitation coverage – insurance customized to address a unique liability and remove that concern from negotiations. In many cases, deal facilitation coverage enables previously unsellable companies to suddenly become marketable again.
Deal facilitation coverage can sideline issues like pending litigation, market instability, environmental concerns and legacy tax issues, or even concerns such as liability for discontinued products that are still in use. A knowledgeable M&A risk advisor can package these liabilities and skillfully negotiate a solution offering via specialized M&A underwriters familiar with deal structuring.
Deal facilitation coverage differs from representations and warranties insurance because it addresses very like a home buyer’s policy, which covers a wide range of unknown situations.
By quantifying every future risk and liability, all cards are on the table. Buyers are prevented from negotiating under a false assumption that certain conditions might precipitate unknown risks, thus changing modeled valuations and seeking purchase price adjustments. With a quantitative risk analysis, material unknowns are addressed and everyone at the table can negotiate apples to apples.
There is also a marketing advantage to presenting a company for sale through full transparency. A company at auction that has analyzed all of its risks by a third party advisor is an attractive prospect for any deal team accustomed to stumbling over skeletons that can sour a deal.
When all risks have been tallied, addressed and accounted for, buyers build confidence that the sell-side team has been open and forthright about the material aspects of their business. It’s a level of trust that can only be established from the beginning.
For more information, contact your local Hylant representative or Kip Irle, leader of Hylant’s Private Equity Practice at 312-283-1339 or firstname.lastname@example.org.