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

Neglecting to perform thorough risk and insurance due diligence on a deal can significantly hinder value-creation opportunities and the optimization of a target company's insurance program. For example, investors may miss favorable current insurance market conditions or synergies through the consolidation of fragmented insurance programs, often being the legacy of past mergers or target-level bolt-on acquisitions. These inefficiencies can leave potential cost savings on the table and negatively impact earnings before interest, taxes, depreciation, and amortization (EBITDA) performance.

A comprehensive experience- and data-backed due diligence process can help investors capitalize on these opportunities to maximize 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 programs to achieve favorable outcomes for their portfolio companies. This approach gives dealmakers greater confidence during pre-deal diligence and can drive costs 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. Rather than approaching each portfolio company individually, the firm adopted a centralized model. This created greater visibility into exposures and more efficient risk mitigation across the portfolio. Through coordinated benchmarking, policy alignment, and shared 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 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.

Failing to conduct targeted risk and insurance due diligence can lead to significant hidden liabilities and unforeseen costs. For instance, a seller may have raised self-insured retentions or underfunded claims reserves, masking the company’s true financial. 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 carried a £100,000 deductible across all major insurance classes, along with numerous small losses totaling £500,000 and an estimated £500,000 in incurred but not yet 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 a desired level of insurance coverage post-close. A well-executed due diligence exercise allows buyers to fully understand how the target’s historical liabilities align with their funding mechanisms and deal terms. This allows for costs to be financed appropriately and aligned with the new owner’s risk appetite.

Without strategic focus on deal transaction provisions, buyers may face unfinanced or uninsured liabilities post-deal, straining financial resources and diminishing 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 minimize the risk of uninsured claims arising post-completion.

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

Proactively identifying and addressing these risks not only supports sustainability goals and can enhance insurability but has the potential to lead to more favorable 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 time and temperature scenarios. These insights provide clients with clear view of how changing weather patterns could impact the structural integrity of assets, operations, and revenues – informing better decisions both buy- and sell-side deals.

Evaluating the target company's workforce dynamics, people costs, engagement, and cultural compatibility enables smooth transitions and talent retention post-acquisition. Research by Mercer shows that among deals that fail to deliver expected financial outcomes, in almost half — 47% — the main contributor was a failure to address 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 any skills gaps, supporting seamless integration, and long-term success.

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

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.

Case Study:

Best practice:

Conclusion

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

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 risk and insurance due diligence in M&A

Case Study:

Misjudging insurance costs

Failure to uncover hidden costs

Failing to fine-tune risk allocation during negotiations

Best practice:

Overlooking climate and sustainability risks

Underestimating people challenges

Conclusion

Speak with a Marsh representative

Related insights

What sets a great portfolio program apart?

Why portfolio programs aren’t solely for the big players

Optimize your private equity risk management through portfolio programs

Why mandates aren’t the answer for portfolio programs