Risk Management and Valuation

the-carina-nebula-shown-below-contains-eta-carinae-a-massive-star-around-100-times-the-size-of-the-sunFailure to assess business risks in an acquisition impacts value

Organizations involved in mergers or acquisitions, from large to small, have a tendency to conduct minimal reviews regarding the target company’s insurance program and miss areas of risks that seem harmless, but can potentially impact the entire organization.  These missed risk assessments can lead to unintended consequences which can jeopardize the ROI of the transaction. 

Here is an example of a company that didn’t assess all of the risk:

Acme Company was looking to expand through a targeted acquisition.  They wanted to purchase a company with a good product and an excellent reputation.  To their surprise, they found such a target at a reasonable price.  While the target company was not large, the financials were strong and no other “bad” news was identified or uncovered during the due diligence process so the acquisition was consummated. 

With the acquisition complete, Acme Company began the integration process, including the process of folding in the acquired company’s insurance policies into their current insurance program.  However, one item Acme did not contemplate during the due diligence process was how their current insurance underwriter would respond to taking on the exposure of a new product.  On the surface, Acme didn’t see any significant change in their operations and risk exposures as a result of the acquisition; however, Acme’s underwriter was very concerned about the new exposures as a result of the acquisition.  As a result, the underwriter refused to write the coverage and issued a 30 day cancellation notice to Acme. 

Acme was now forced to spend additional time, effort and money obtaining insurance coverage elsewhere or face having a gap in coverage.  Acme ultimately obtained insurance quotes for their newly expanded business but the new insurance premiums were now more than the total sales dollars of the company they acquired.  Now all the financial assumptions and projections Acme laid out for this acquisition have been blown up and this acquisition no longer represents a good valued acquisition for Acme.into the front end of your due diligence process.  Not only can you receive unexpected news from your insurer, but issues identified by risk management can assist management in learning more about the target company’s operations and management.

This example reinforces the need to incorporate risk management into the front end of your due diligence process.  Not only can you receive unexpected news from your insurer, but issues identified by risk management can assist management in learning more about the target company’s operations and management.

Risk Management Resources (RMR) is one of the largest independent Risk Management firms in the country, with over 100 years of experience in helping companies address these and other issues.  We don’t sell any insurance.  We simply help companies better manage their risks and free up additional time for the busy executives currently managing the insurance program, saving them time and money and helping to ensure they achieve their long term strategic business objectives.  Call Brad Pint or Carl Lidstrom at 952-944-8515 or email them at bpint@rmrrisk.com or clidstrom@rmrrisk.com  if you would like to learn more about how we help our clients with their due diligence process.                                      

Have something to add?
Got a different point of view, want to play devil’s advocate, or just think we’re all wet? Post your experiences or examples.
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