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DE-RISKING the PURCHASE or SALE of a business


M&A risk and insurance due diligence, which includes rep and warranty insurance, is one of the main drivers of actual IRR. Some of the largest private equity houses have dedicated risk committees involved within each due diligence process and addressing risks and challenges for each portfolio company post-acquisition. For investors who may not have comprehensive resources available to them to perform effective risk due diligence, commercial insurance becomes even more important in its function to minimize post-acquisition risks. Is it therefore important for investors to focus on an M&A insurance due diligence checklist which has three parts to it:

  1. Commercial insurance of the Buyer to be amended for deal specifics;
  2. Deal specific insurance, known as rep and warranty insurance, to be structured or reworded in order to protect investors from post-deal risks;
  3. Commercial insurance of the Seller to be analyzed and amended accordingly for deal specifics.

It is important that the M&A insurance due diligence checklist be reviewed by risk experts independent of any insurance broker or company. On average, investors who successfully perform and implement a risk due diligence process add 200-400bps to their annual investment returns.

Importance to Seller of an M&A Insurance due diligence checklist

De-risking the business yields the following benefits to a seller and should therefore be their number one priority:

  • Boosts value and liquidity: the seller can simply earn much more by de-risking their business operations;
  • Makes the business more marketable vis a vis other options;
  • Creates more competition amongst buyers;
  • Enhances deal terms;
  • Minimizes the time to Letter of Intent and Close.

Importance to Buyer of an M&A Insurance due diligence checklist

A ‘de-risked Target’ yields the following benefits to a buyer:

  • Much better downside protection to investors;
  • Minimized impact of post-close losses (incl. liabilities);
  • A more competitive bid vis a vis competition through risk-adjusted valuations;
  • Smoother integration into an existing business or portfolio.

Examples of risks to be included in an M&A Insurance due diligence checklist

Deal valuation risks

  1. Overpaying for deals
  2. Current valuations
  3. Unclear strategy and deal rationale
  4. Limited access to a Target's data
  5. Insufficient financial and risk due diligence

Core operational risks

  1. Insufficient operational and risk due diligence
  2. Maintaining strategic focus
  3. Underestimating the execution process on projected synergies
  4. Underestimating the integration of processes
  5. Corporate governance around synergy capture
  6. Target's management team capabilities and integration
  7. Combined IT infrastructure and related costs
  8. Inconsistent planning and execution

Ancillary operational risks

  1. Culture assimilation challenges
  2. Employee engagement issues
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