Top Three Due Diligence Items When Acquiring a Staffing Agency or PEO
Are you looking to acquire additional staffing companies or PEOs down the line? Or, do you think there’s a possibility your organization might be sold? Staffing Industry Analysts noted 69 publicly announced acquisitions of staffing firms in North America last year. While 69 might not seem like a lot, there’s still an abundance of smaller acquisitions happening all the time. In fact, even the smallest of acquisitions creates a lengthy list of due diligence items because of the large number of business liabilities.
Here are three tips to consider when buying or selling an agency:
1. Determine all potential liabilities. This is often the biggest pitfall for most buyers. Requesting loss information for all lines of insurance is rather straightforward, but determining liabilities for unforeseen situations is far more difficult. Some of the more common situations include:
- Determining if the limits in place on existing coverage are sufficient for suits that the seller has knowledge of
- Reviewing client contracts and determining if the assumed liabilities could lead to future lawsuits
- Reviewing loss sensitive workers’ compensation program details to determine if additional premiums and/or collateral may be due
- Reviewing all notices of suits or even threats for existing relationships that could lead to potential problems for the buyer
2. Protect your company from misrepresentation. The easiest answer to this common problem is to carefully audit ALL data submitted. For example, when payroll is provided, confirm that all of the placements were coded properly for workers’ compensation purposes. Request prior years’ payroll audits to ensure consistent and proper classifications were used. When reviewing the loss history of each line of insurance, determine if there were unreported or other types of suits that could become a much larger issue later. When reviewing financials, have your CPA or other qualified professional determine if questions should be asked for any of the line items.
3. Consider having the seller purchase Representations and Warranties (R&W) insurance. This type of policy can eliminate the issue of uninsured liabilities becoming a problem for the buyer and seller. This is a cleaner way to protect you from unknown liabilities, rather than requiring an escrow fund, which can freeze a large portion of the proceeds from the sale, or may not be sufficient depending upon the type of liability that arises.
As with any significant undertaking involving the assets of your firm, work with a team of individuals (e.g. attorney, insurance broker, M&A specialists...etc.) that have experience in acquisitions and in the staffing or PEO business.
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