DealLawyers.com Blog

Woodruff Sawyer recently published a guide for insurance due diligence on M&A transactions.  The publication highlights the importance of insurance and risk management due diligence for private equity transactions, and notes that poor execution of due diligence and implementation of insurance and employee benefit programs may expose buyers to increased risks that could diminish short-term EBITDA and the long-term value of the target’s business.

This excerpt discusses some important findings about issues with target coverage that Woodruff Sawyer observed last year in due diligence investigations for middle-market and growth equity transactions:

No comprehensive, strategic approach to insurance and risk management. While a foundation of coverage has been established, no long-term insurance strategy for EBITDA protection has been developed or implemented. The insurance advisor should recommend ways to both professionalize the
program and raise the level of sophistication of the insurance program post-close to maximize EBITDA protection over the lifecycle of the investment.

Key coverages are missing. For many target acquisitions, the deal represents the first time the company has accepted institutional investors or considered a buy-out from a private equity sponsor. This situation means new board members and potentially a new approach to insurance. What may have been treated as low priority pre-close (due to cost, for example) may be treated differently with a new private equity owner or growth equity investment because the buyer or investor will always seek to protect their investment.

Limits are inadequate. Like the previous point, a company pre-close will choose a limit for a variety of reasons. We have found the company typically has not performed any benchmarking analysis around limit adequacy. As an institutional investor becomes involved, there should be greater thought around limit adequacy to protect the short and long-term EBITDA of the company.

Examples of key coverages that are frequently missing include D&O, commercial crime, cyber liability or product recall liability, while examples of coverages that frequently have inadequate limits include cyber liability, business income and extra expense, contingent business income, and products liability.

– John Jenkins