There are many factors that go into determining the value of a company. Many buyers and sellers don't realize, however, that an M&A deal's value changes based on existing workers' compensation claims, coverage history and program status.

"Successors must look closely at the company they're acquiring," says Nathan Kenney, Chief Operating Officer at Spooner, Inc. "When you combine two entities, everyone's situation can get worse. If you don't take workers' compensation into account when doing a deal, you'll pay more than the value the acquired company brings to the deal in the long run."

Smart Business spoke with Kenney about the effect workers' compensation liabilities have on an M&A event and how a correct value can be assessed.

How are the parties in an M&A deal affected by workers' compensation liabilities?

When an M&A deal is executed the predecessor company is no longer responsible for its workers' compensation liabilities — they transfer to the successor company at the date of the close with all rights and obligations following.

Companies need to know that if they are acquiring a company with a history of mismanaged claims, they will pay the price in higher penalty rates and premiums. It is common for companies to treat workers' compensation as an inevitable benefit rather than investing in a proactive approach to the management of claims.

What protections against workers' compensation liabilities does a deal structured as an asset purchase provide?

Unfortunately, no deal structure can provide protection. Ohio law allows the Bureau of Workers' Compensation (BWC) to transfer the claims and experience of the acquired company to the successor regardless of how a deal is structured. There are limited exceptions to the rule, but those cases typically end up in adjudication or court.

How can an M&A event affect group rating?

When a company is part of a workers' compensation group rating program, the group administrator needs to be notified before a merger occurs. The claims and payroll from the company that's joining the group must be accounted for so the group's administrator can see how its entry will affect everyone involved.

Bad claims can devastate the premiums of all a group's members. Even if the change only amounts to an increase of a couple percentage points, spread over millions of dollars in payroll it becomes significant.

In most cases, companies that participate in group rating programs agree to inform their group administrator whenever a purchase or merger is being contemplated. In the event the transaction has a negative impact on the group program, the acquiring company would agree to indemnify and hold harmless the entire group.

If the merger causes financial harm to other members of a group or adversely affects the acquiring company's risk of future losses, and the acquiring company did not disclose the potential merger, the BWC allows the group sponsor to request that the offending company be removed from the group. That can sometimes cost hundreds of thousands in lost discounts or refunds.

Talk to the group administrator about any M&A plans. Have the deal examined to eliminate any surprises.

What due diligence should be done ahead of an M&A event?

Any company involved in an acquisition should complete a comprehensive review of the workers' compensation policy of the company being acquired. This includes evaluating claims history, outstanding balances with the BWC and attorney general, how the predecessor's programs align with the successor's programs, and whether there were individual retrospective or deductible program participation in the history of the company. All of these can lead to increased liabilities, especially when a company is purchasing a struggling business, as there's the chance it has greater workers' compensation problems and claims that need to be expertly managed immediately. Once a complete picture of the deal can be seen, it's easier to adjust the purchase price.

Ask questions to ensure the workers' compensation piece has been reviewed because it can significantly affect the benefit of doing a deal. Failure to do so will have lasting repercussions.

As reported by Adam Buroughs at Smart Business Magazine

Nathan Kenney
Chief Operating Officer, Spooner, Inc.
(440) 249-5679
nkenney@spoonerinc.net