Buy-side M&A | M&A in the Insurance Industry Guide to Navigating Confirmatory Due Diligence in M&A

Confirmatory due diligence is a comprehensive examination conducted after an initial Letter of Intent (LOI) or term sheet has been issued during a merger and acquisition (M&A) process. This phase is designed to intensively scrutinize every assumption made about the target company, identify and assess risks and liabilities, and prepare for post-closing integration.

For independent insurance agents considering acquiring another agency or selling their own business, confirmatory due diligence is a crucial stage in the M&A process. It provides a detailed analysis to confirm valuation assumptions made during preliminary due diligence and uncovers any risks associated with the deal. Performing thorough confirmatory due diligence sets the stage for a successful transaction between independent agencies.

Difference Between Preliminary and Confirmatory Due Diligence

Preliminary due diligence typically occurs early in the process after a non-disclosure agreement (NDA) is signed. It provides a high-level assessment to determine basic understanding of the target and valuation. Preliminary due diligence is streamlined and condensed to conserve time and resources in case the target is found unsuitable for acquisition.

In contrast, confirmatory due diligence is a much more extensive and detailed analysis that takes place after the LOI or term sheet is issued. The purpose is to thoroughly confirm all assumptions made during preliminary due diligence, uncover any potential risks or liabilities, and develop concrete integration plans. This phase ensures the buyer has validated that the transaction is viable and likely to proceed, unless major issues are identified that could impact valuation or the strategic rationale.

The M&A Team

A dedicated team is crucial for a systematic confirmatory due diligence process. This team could include a mix of internal and external experts:

HR Team: Examines employee agreements, identifies key talent, evaluates cultural integration aspects, addresses potential liabilities and develops talent retention strategies.

Accounting Team: Conducts a deep review of financial statements, possibly more extensively than during preliminary due diligence, and produces a quality of earnings report. They work with internal teams to evaluate assets and liabilities.

Tax Team: Reviews the tax compliance and accuracy of the target agency, analyzing previous filings and potential exposures.

Considerations for Independent Insurance Agents

Independent insurance agents looking to acquire another agency or sell their own business should be prepared for a confirmatory due diligence process. Some key considerations include:

• Detail-Oriented Review: Agents need to prepare for a microscopic look into the prospective agency, covering legal, financial, and operational aspects. This level of scrutiny is essential to avoid surprises after the acquisition.
• Risk Assessment: Understanding all potential risks upfront is crucial to avoid surprise liabilities, especially in the tightly regulated insurance industry. Thorough due diligence enables agents to accurately evaluate risks.
• Financial Verification: Verifying the target agency's financials is especially important, ensuring their book of business and cash flows are accurately represented and align with the buyer's expectations and valuation. The accounting team's findings are pivotal.
• Cultural Compatibility: For an independent agent, ensuring that the target agency fits culturally could dramatically affect client and employee retention post-acquisition.
• Integration Planning: The article emphasizes planning for integration during confirmatory due diligence, which should align with how the buyer will absorb the target's operations, personnel, and systems.

Conclusion

Confirmatory due diligence is a critical phase of the M&A process that can determine the success or failure of a deal between independent insurance agencies. It allows the buyer to validate assumptions made during preliminary due diligence and uncover any issues before finalizing the transaction.

Comprehensive confirmatory due diligence provides the opportunity to thoroughly assess the accuracy of financial statements, verify the value of assets, evaluate potential risks and liabilities, and plan effectively for post-merger integration. This prevents any unwelcome surprises post-closing that could negatively impact the return on investment.