Employment-related costs associated with a business merger rarely get the same attention as the commercial considerations that drive the deal. For purposes of closing the transaction, the expenses related to a workers’ compensation program may be trivial compared to the target company’s asset value. But once the deal is done, the acquiring business needs to get serious about how the target’s history affects the combined firm’s profile.
Address workers’ compensation in due diligence
Discovering problems with a target business’s workers’ compensation program or safety culture only after a deal has closed can be disastrous for the acquiring company. This is especially true when the acquiring business has a strong safety record, while the target does not.
At a minimum, the acquiring firm needs to know the target company’s workers’ compensation experience modifier rating, or ex-mod. The ex-mod is calculated using a company’s workers’ compensation claims history. When a company with a relatively low ex-mod acquires a business with a high ex-mod, the target’s poor record may cause the combined firm’s ex-mod to spike. Insurance is likely to be more expensive and may be harder to get.
The acquiring firm should conduct a thorough analysis of the target’s safety policies and processes. When possible, review the target firm’s safety records and conduct interviews about the target’s safety culture. If these steps reveal problems, but the deal goes forward anyway, the acquiring firm will be equipped to plan for addressing them.
Accounting for legacy claims
A target business’s legacy workers’ compensation claims can be a hidden cost of an acquisition for companies that aren’t looking out for them during their due diligence process. Workers who suffer long-term injuries or illnesses may be entitled to benefits for many years to come. Disability payments, which include medical costs as well as wage substitution and other benefits, can represent a significant cost burden for insurers.
Claims costs translate into higher workers’ compensation ex-mods, which in turn lead to higher premiums. By understanding these issues in advance of closing, an acquiring company can plan for these effects. Ideally, they are included in the price paid for the acquired business.
Get a quick handle on safety
Once an acquisition closes, the parent organization must quickly analyze and address potential safety concerns at the target company. The target organization’s way of doing business will be different from the parent’s. Until the two teams are brought into sync, the combined business may be at increased risk of incidents.
Instilling the parent organization’s safety culture into an existing team can be challenging. It takes patience, dedication, and leadership from the top. It also takes a hands-on approach by safety advisors who are trained to quickly identify gaps in safety practices.
When an acquisition is of a distinct business unit, perhaps located far from the parent company’s existing operations, conducting the post-closing safety review only at the acquired company’s location might be warranted. In circumstances where the operations of two teams will be merged, a comprehensive safety review may be required to ensure the deal hasn’t created unanticipated problems.
Gunnin supports clients in all phases of risk management
Gunnin Insurance has the risk management expertise businesses need to get their risk management programs from where they are to where they want to be. We can support your business through a pre-merger due diligence process, or in a post-merger review. Our insurance professionals have deep experience helping clients with high ex-mods and other workers’ compensation challenges find sustainable, profitable coverage. Give Gunnin a call today to schedule an appointment with a member of our team.