Don't Let Me Be the Last to Know
Staffing and PEO Merger & Acquisition Due Diligence
I was a moderator on this very topic at the Launch Staffing Conference in September. The subject of organizational growth is hot right now. But what I found is that most staffing companies & PEOs going into a merger or acquisition don’t always know all the complexities and due diligence items attached.
In fact, far too often the insurance broker is the last to know about your acquisition. The first time we often hear about an acquisition is after receiving a request for certificates of insurance for the acquired entity. After our initial ‘?!?!?’ moment, we start asking for the documentation that we, your insurance broker, and the insurance carrier need in order to complete the due diligence process.
Through this due diligence process, we’ll be able to:
- Determine the impact of your workers’ compensation experience modification when the target company’s risk experience is added to your mod. Combining the target’s experience into yours could cause your experience modification to increase or decrease greatly, thus impacting your workers’ compensation costs after the acquisition.
- Predict the impact of your target’s risk profile on your future insurance costs from your existing insurance carrier. Your insurance carrier may determine that the risk experience associated with the target significantly changes your overall risk profile, thus having negative implications on your future insurance programs.
- Review the accuracy and acceptability of workers’ compensation class codes and types of temp placements the target is making. We’ve experienced many situations where the existing underwriter will reject coverage for certain customers of your target. You need to know the potential of this happening prior to closing on a transaction. You’re paying for a book of business you expect to continue working with. If your insurance carrier won’t cover it, you’ll either have to terminate the customer or find coverage elsewhere and likely at a much higher cost.
Your broker should also review loss runs in great detail to determine the accuracy of reserves on claims incurred by the target. If you’re acquiring the stock of the target, you’ll likely be assuming the liabilities of that company. You must know, with the greatest amount of certainty possible, what the largest potential exposure is for the known liabilities the target has.
We can also help assess your target’s risk management program to determine what resources are needed after the acquisition. If their claim severity or frequency is significantly different than yours, you’ll want to know why, so that it can be fixed.
The above items can have a positive or negative impact on your agency in the months and years following an acquisition. Regardless of it being positive or negative, you need to know these answers BEFORE you close, not after. You’ve engaged your CPA to financially model the transaction. You’ve engaged your attorney to review the pile of paperwork associated with the transaction. Now, don’t forget to engage your insurance broker in the transaction to help ensure its ultimate success.
- Top Three Due Diligence Items When Acquiring a Staffing Agency or PEO
- 2016 Industry Outlook Video: Staffing
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