Six risky missteps that highlight the need for quality M&A due diligence

Carve-out transactions present unique challenges, requiring careful pre- and post-deal management. For example, sellers often allocate group insurance premiums to target subsidiaries or divisions using historical data or a formula. As a result, the actual go-forward insurance costs for a newly separated business may be substantially higher. Identifying this early is critical, particularly as the risk tolerance of a newly formed standalone company may be differ significantly. Addressing this challenge can present longer-term value-creation opportunities as the target develops its own approach to risk after the deal and seeks to achieve better insurance pricing outcomes.

Additionally, negotiating ongoing access to the seller's group insurance policies for pre-completion events can significantly streamline the transition and assist in minimizing or avoiding coverage gaps. Without thorough due diligence, buyers risk facing inflated post-close costs and potential coverage gaps. Without thorough due diligence, buyers risk inflated post-close costs and potential coverage gaps that could undermine operational performance and compromise the deal's financial success.

Data from Marsh's Transaction Advisory teams in the UK and Europe shows that, on average, open-market prices for insurance premiums for newly standalone businesses are 70% higher than the costs allocated when they were part of a previous owner's group program.