M&A Due Diligence: Insurance, Lawsuits, and Government Paperwork - dummies

M&A Due Diligence: Insurance, Lawsuits, and Government Paperwork

By Bill Snow

A Buyer wants to purchase a business that is safe from unnecessary risks. During the M&A process of due diligence, he should check on the Seller’s insurance, lawsuit history, and government paperwork filings.

M&A due diligence: Insurance

Insurance — that is to say, risk management — is another important factor for any Buyer. Understanding the costs of insuring Seller’s business is important, of course, but so is understanding the underlying risks associated with the business. Insurance info for due diligence may include the following:

  • The company’s insurance policies, which may include general liability, personal and real property, product liability, errors and omissions, directors and officers, and worker’s compensation.

  • Schedule of insurance claims

  • Listing of areas of self-insurance

  • Listing and description of any outstanding premium adjustments

Buyers may be able to get better insurance rates after the deal closes; larger companies are often able to warrant preferred pricing from insurance carriers.

M&A due diligence: Litigation history

Understanding Seller’s history with lawsuits, both as a defendant and plaintiff, is another must-know due diligence area for any Buyer. The following list lays out some important litigation info:

  • All litigation, arbitration, and other proceedings to which the company is a party

  • Listing of all pending or threatened claims, lawsuits, arbitrations, or investigations (including investigations by any governmental authority)

  • Description of settlements of litigation, arbitration, and other proceedings

  • Bankruptcy proceedings in which the company is a creditor or otherwise interested

  • All orders, injunctions, judgments, or decrees of any court or regulatory body applicable to the company

  • All agreements in which the company agrees to indemnify or hold harmless another person or entity for claims against that person or entity

  • Schedule of any litigation involving an officer or director of the company concerning bankruptcy, crimes, securities law, or business

M&A due diligence: Governmental filings

Depending on the industry and the nature of Seller’s business, a slew of government filings and paperwork are a part of due diligence. These documents include

  • Any governmental licenses, permits, and authorizations

  • All filings to any national, state, or local governmental agency or authority, including the SEC, the IRS, the FDA, and the INS, to name just a very few

  • Any complaints, investigations, or other informal or formal proceeding by or before a governmental agency or authority and involving the company