Know the Party You’re Merging With Inside and Out

RCS Influencer Seth Pietsch says that you should understand exactly what kind of liability you are taking on with the company you are purchasing. 

Editor’s note: The following is an interview with Integrity Insurance & Bonding Inc.’s Director of Marketing, Devri Pieratt and President Seth Pietsch.   

Q: How do mergers and acquisitions affect both parties’ current coverage?  

A: When it comes to mergers and acquisitions in the roofing industry, it’s critical to be mindful of the transfer of liability between the parties. Buyers need to know that they’re potentially acquiring the liability associated with the company that they’re purchasing. If the company being sold has been doing work for several years, the new owner can be on the hook for any construction defects on work completed by the prior owner, within the statute of repose. In Oregon, that’s ten years for residential and small commercial and it’s six years for large commercial. 

Q: Could there potentially be a gap in coverage when transferring ownership? How can these be avoided?  

A: Absolutely. To avoid gaps in coverage, new owners need to have a solid understanding of the types of work performed under the prior ownership. Was it new residential? Were roofs installed on buildings over a certain height? This type of work will need to be covered under the new insurance policy – even if the new owners choose not to do that type of work. Again, this is because the policy the new ownership purchases must cover not only the work they do moving forward, but also those projects completed under the previous ownership – that still fall within the statue of repose.  

Another thing to be mindful of is the mod rating of the company, prior to acquisition. New owners will be automatically surcharged a higher workers comp premium if the mod ratings of the prior company were higher than 1.00.    

Q: Do you have to notify the insurance companies within a certain period of time that you are planning an acquisition? 

A: Yes. Most agents would prefer to be notified a month, or so, before the acquisition is finalized. This is so they have time to notify the insurance carrier and make sure that all of the changes are effective in time for the date of sale. Bonds may also need to be re-written, and paperwork will need to be filed with the appropriate construction licensing board, business registry, etc. 

A lot of mergers are very “hush-hush” until they are officially announced. But your insurance agent, attorney, and CPA really need to be kept in the loop ahead of time, so that proper adjustments can be made to ensure the transaction happens smoothly. You don’t want delays with bonds and/or insurance to hold up the sale or purchase.   

Q: Will it cost money? 

A: Yes, it will. There will likely be fees associated with updating CCB paperwork, issuing new bonds and writing new insurance policies. But there could be other fees, as well, depending on how the buy-out is structured.  

Q: Do you need to purchase insurance for the deal itself? 

A: In most cases, no. The insurance for the business that is selling will apply until it’s either transferred into the new name or that policy is cancelled and a new policy is written for the new ownership.  

Q: How would old or existing claims be handled?  

A: For the owners selling the business, it’s important to go through the proper procedures with your legal team, if you’re dissolving the entity. You want to make sure that you no longer have any exposure with that prior entity and that the proper dissolution process is met. 

If the policy is being transferred over to the new ownership, make sure the insurance carrier knows that you’re no longer associated or affiliated with that entity, and that the new ownership’s information is given to that respective agent so they can make sure that the new owners are listed in the policy and now they’re responsible for any claims.  

Q: Do you have any horror stories from acquisitions?  

A: I, personally, have not experienced an acquisition horror story, but they do happen. Suppose you purchased a new business and the transaction took place on 7/1, with projects scheduled to start on 7/2. Until you’re officially licensed and/or bonded under that new entity, you can’t perform work legally. If there are any delays in the process of getting your insurance documents registered with the state, and you are unable to start the project on time, you could be faced with paying liquidated damages, etc.  

It's critical to give your legal advisors plenty of time to prepare for a smooth transition. It’s also important to remember that just because XYZ Roofing had a bonding capacity of $2M, doesn’t mean that bonding capacity automatically gets transferred over to the new owner. New owners are re-evaluated and they’re looked at as a new entity. If they don’t have superb credit, that bonding capacity may or may not transfer over.  

Q: What if the new ownership couldn’t get bonded?  

A: If a new owner can’t acquire the applicable bonds, they won’t be able to perform the work. A company whose portfolio is packed with a large number of upcoming government contracts might look very enticing to someone looking to purchase the business. But if the buyer isn’t able to get the bonding needed to fulfill those future contracts, that’s going to be a major hurdle and could potentially derail the sale.  

Seth Pietsch is the president of Integrity Insurance & Bonding Inc. See Seth’s full bio here