PE Firm Uncovers $300K in Hidden Risks with Target Acquisition

Challenge

A PE firm was preparing to purchase a residential roofing company. The roofer participated in a group captive insurance program, making it difficult for the PE firm to understand what their insurance run rate for the roofing company would be after the sale. They hired Hylant to help it gain visibility into possible issues.

Solution

Experts from Hylant’s construction, captive solutions and M&A practices performed a quality of risk analysis on the proposed acquisition. They made the following discoveries:

• The captive had underreported exposures for at least two consecutive years, understating the roofing company’s cost of workers’ compensation, general liability and professional liability insurance by $282,800. When annual insurance audits identified this underreporting, the roofing company had to pay the amount due within 30 days, a cash flow challenge. Had the exposures been appropriately reported, the roofing company could have paid monthly installments throughout the year.
• The retail broker for the captive had charged the roofing company $50,000 in undisclosed broker commissions, which was not allowed under state law.
• Additional savings were identified when it was discovered that the roofing company qualified for but had not used a contractor credit. Doing so could have reduced its workers’ compensation insurance costs by $35,000.

Having the right insurance due diligence consultant on your deal team can help you maximize the value of your merger or acquisition.