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

In the fast-paced world of mergers and acquisitions, a modest oversight can lead to significant financial and operational challenges. Identifying and addressing potential transaction-related risks before they materialise is key to safeguarding investments and achieving long-term success.

A comprehensive due diligence process helps buyers identify potential issues — ranging from insurance and workforce dynamics to emerging challenges such as climate and cyber risks — that could affect the target’s value or derail the transaction. By uncovering hidden risks and potential liabilities, robust due diligence provides businesses with the clarity to navigate complex deal landscapes. These efforts not only help safeguard investments but also lay the groundwork for long-term acquisition success. When risks are missed or underestimated, the consequences can be substantial — from regulatory penalties and reputational damage to operational disruptions and failed transactions.

Here are six potential missteps, identified by Marsh’s team of M&A risk and insurance specialists, which, if properly managed, can help buyers mitigate downside risk, unlock value, and gain a competitive edge.

Neglecting to perform thorough risk and insurance due diligence on a deal can significantly hinder value-creation opportunities and the optimisation of a target company’s insurance programme. For example, investors may miss favourable current insurance market conditions or synergies through the consolidation of fragmented insurance programmes, often legacy issues from past mergers or target-level bolt-on acquisitions. These inefficiencies can leave potential cost savings on the table and negatively impact EBITDA performance.

A comprehensive, experience- and data-backed due diligence process can help investors capitalise on these opportunities to maximise value. It also enables the implementation of cost-effective insurance strategies that support sustainable growth from day one of the investment lifecycle.

Private capital sponsors are increasingly adopting insurer panels and portfolio-wide insurance programmes to achieve favourable outcomes for their portfolio companies. This approach gives dealmakers greater confidence during pre-deal due diligence and can drive cost synergies post-acquisition.

Case Study:

Marsh’s PEMA team recently worked with a global private equity firm to develop a portfolio-wide strategy for managing cyber and directors and officers (D&O) liability risks. Instead of approaching each portfolio company individually, the firm adopted a centre-led model. This created greater visibility into exposures and more efficient risk mitigation across the portfolio. Through coordinated benchmarking, policy alignment, and sharing best practices, the portfolio companies enhanced governance, improved coverage terms and pricing, and outperformed market peers by 20% in key metrics related to loss frequency and insurance cost efficiency.

This case underscores the value of a proactive, portfolio-level perspective in M&A-related risk strategy — one that can deliver measurable impacts beyond the deal itself.

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 based on historical data or a formula. As a result, the actual ongoing insurance costs for a newly separated business may be significantly higher. Identifying this early is critical, particularly as the risk appetite of a newly formed standalone company may differ considerably. Addressing this challenge can create 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 help minimise or avoid coverage gaps. Without thorough due diligence, buyers risk facing inflated post-completion 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 programme.

Failing to conduct targeted risk and insurance due diligence can lead to significant hidden liabilities and unforeseen costs. For instance, a seller may have increased self-insured retentions or underfunded claims reserves, masking the company’s true financial position. When a new owner takes over, their risk appetite may differ from that of the seller, exposing the new owner to unexpected financial impacts that were not fully accounted for at the time of acquisition.

Example: In a recent UK acquisition, Marsh specialists reviewed the target company’s current and historic insurance arrangements, uncovering significant hidden liabilities. The analysis revealed that the parent company carried a £100,000 deductible across all major insurance classes, along with numerous small losses totalling £500,000 and an estimated £500,000 in incurred but not reported (IBNR) claims. This meant that the buyer could have been responsible for £1 million in uninsured losses.

The Marsh team promptly informed the buyer, enabling them to factor this information into negotiations. As a result, the seller agreed to indemnify the buyer for all self-insured losses occurring prior to completion.
This case highlights how robust due diligence can uncover critical information that protects the buyer and facilitates a stronger investment outcome.

Well-structured deal contracts help manage risk allocation between buyer and seller. For buyers, gaining full access to the target’s pre-deal insurance assets is essential for maintaining the desired level of insurance coverage post-completion. A thorough due diligence exercise allows buyers to understand how the target’s historical liabilities align with their funding mechanisms and deal terms. This enables costs to be financed appropriately and aligned with the new owner’s risk appetite.

Without strategic focus on deal provisions, buyers risk unfinanced or uninsured liabilities post-deal, which can strain financial resources and diminish the value of the acquisition.

Best practice:

Incorporating insurance due diligence findings into the sale and purchase agreement and related documents can protect buyers from unforeseen liabilities. Legal counsel may also secure protections through warranties and undertakings, including assurances regarding the validity of current and historic insurance, confirmation that premiums have been paid, and statements that all claims or incidents have been disclosed. These measures help minimise the risk of uninsured claims arising after completion.

Climate risk and other sustainability challenges can significantly influence the long-term success of an acquisition, return on equity, and eventual exit prospects. A robust due diligence process can uncover vulnerabilities, such as potential supply chain disruptions or physical asset risks, enabling acquirers to identify opportunities for improvement, enhance the overall risk profile of the business, and meet investor or regulatory requirements.

Proactively identifying and addressing these risks not only supports sustainability goals and can improve insurability but also has the potential to lead to more favourable insurance terms and premium levels, ultimately contributing to a stronger, more resilient investment.

Marsh’s M&A team has expanded due diligence into climate risk, using advanced tools to model a wide range of weather-related risks across multiple scenarios. These insights provide clients with a clear view of how changing weather patterns could impact the structural integrity of assets, operations, and revenues — informing better buy- and sell-side decisions.

Evaluating the target company’s workforce dynamics, people costs, engagement, and cultural compatibility is essential for smooth transitions and talent retention post-acquisition. Research by Mercer shows that among deals that fail to deliver expected financial outcomes, nearly half — 47% — were primarily due to failure to manage people risks.

Thorough due diligence can identify potential challenges, from talent retention issues to legal or compliance concerns in employment practices.

Understanding key personnel and their roles allows acquirers to develop strategies for retaining top talent and addressing skills gaps, supporting seamless integration and long-term success.

Conclusion

The complexities of private capital-backed and M&A transactions demand a strategic approach that looks beyond surface-level risks. By proactively addressing key areas such as insurance strategies, workforce dynamics, integration challenges, and emerging risks, organisations can create significant value and avoid costly missteps.

Marsh’s Private Equity and M&A team leverages deep experience in risk management and insurance strategies, providing actionable insights to help organisations uncover hidden risks and optimise their approach throughout the transaction lifecycle. Today, our portfolio company brokerage platform supports more than 2,500 private capital-backed companies, representing over US$4 billion in insurance premium spend across the market. This scale, combined with proprietary data and analytics tools, offers valuable insights to inform smarter risk and insurance decisions.

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