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Risk Management Considerations for M&A Deals

July 7, 2020

By Adam Billmeyer, Sales Executive at Lovitt & Touché, A Marsh & McLennan Insurance Agency LLC

Merger and acquisition deals can be an exciting opportunity for any business. But these deals can be complex – and there are several aspects to consider when it comes to risk management. When examining M&A deals, every industry is unique and associated with different types of risk. It’s important to enlist the support of a third party, like a broker or an insurance consultant, sooner rather than later, to avoid surprises or unexpected costs.

What Aspects Should be Front-of-Mind When Drafting an M&A Deal?

When you’re evaluating an M&A deal as an acquiring company, examine your target company’s prior risk management strategy and performing due diligence. A consultant can help you with the following items:

Identifying Gaps in Coverage – Take a close look at the business’ current coverage, starting with an overview of its existing program summary. This should provide insights to develop a claims analysis, loss forecasting and more. A comprehensive overview also informs a Cost of Risk analysis (both pre- and post-close) as well as collateral requirements.

Analyzing the Purchase Agreement – Uncover influences on purchase price, include current problems or claims that can develop into a costly issue later. For instance, if there is currently a $5 million settlement case, this certainly changes the equation and value of the deal. With that said, acquiring companies should clearly identify any deal breakers.

Outlining Integration Risks – Integration can be a long and complicated process. To save yourself time (and regret), examine various aspects including the business’ existing human resources functionality, employee benefit plan design, compensation and incentive structure and regulatory compliance. You’ll additionally want to consider any political or reputational risks, as well as potential cultural ramifications.

Other Business Considerations – There are plenty of other facets to consider as you sketch out your deal. This could include things like tail liabilities, prior contract reviews and indemnity agreements, severance costs or any open litigation. Moreover, consider intellectual property, as this is frequently a company’s most valuable asset.

What Solutions and Protections Are Available for M&A Deals?

While there is risk at every stage of the M&A process, the good news is there are solutions for businesses to protect their interests. An experienced consultant can help you find the right option to mitigate the risk associated with your deal.  

Representations and Warranties – This solution provides coverage for any financial losses resulting from breaches of representations in addition to warranties made by the sellers in a purchase agreement.

Tax Indemnity Insurance – If you’re facing various tax risks, you may want to investigate tax indemnity insurance. This type of insurance also provides coverage for the intended tax treatment of the transaction.

Contingent Liability Insurance – If there are known risks or exposures where liability may not arise until after the deal closes, consider contingent liability insurance for extra protection.

The fact of the matter is: M&A deals require thought and a critical eye for your business to get the best possible benefits from the arrangement. Don’t wait to bring a third-party expert on board. They’re an expert in breaking down the true value of both assets and liabilities and protecting the value of your business assets. Moreover, they can enhance a bid in an auction situation, ensure deal success, facilitate a clean exit or divestment and protect the board and executives of the company.

Find out more about how we can help you with M&A risk management.