Jeff Schwab knows employee benefit and retirement plans and risk management profiles aren’t sexy. But when ignored, they can unexpectedly derail M&A activity or lead to great pain after the deal closes.
As senior vice president of private equity services at Oswald Cos., Schwab assists M&A clients by combing through organizational policies and procedures and analyzing how they’ll match up under a new corporate structure.
“Our job is to quickly understand if there are any deal breakers or red flags, pull those out immediately, bring them to the attention of the buyer and give them the blunt news that they could be inheriting a problem,” says Schwab, who has worked on hundreds of M&As throughout his career. “We like to increase the amount of certainty somebody feels with a program they are inheriting. It’s critical to treat this as an important component to the soundness of a deal.”
Here are some ways Schwab helps clients identify and forecast risks in their deals — and why he says it’s worth the effort.
Prepare for the unexpected
When one of his clients was looking to purchase a building and an inspection revealed a faulty sprinkler system, for example, Schwab immediately made it a priority for the business.
He says, “Your business operations could be at risk if this is a single-location facility and the building burns down and all your equipment, inventory and raw goods are lost.”
Schwab commissioned an estimate of what it would cost to upgrade the sprinklers.
“It became a negotiating point,” he says. “They were either going to get a purchase price adjustment or escrow was going to be held for these protections in the event that the insurance went through the roof as a result. It was a multi-pronged response to how we wanted to handle it. They could have bought insurance, but it might have doubled in cost in two years because once a new carrier would come in, they’d say, ‘It’s time to look at this building’ and the sprinklers may be out of date.”
Schwab will occasionally field calls from clients who are negotiating a deal and tell him, ‘I don’t think this is going to be a big deal. We should breeze right through it.’ That’s typically when the red lights begin flashing for Schwab, and he sharpens his focus on potential pitfalls.
“Those are the ones that turn around and bite you,” Schwab says.
Make the effort
There is almost always a solution to your problem, even in the complex world of benefit plans, policies and procedures.
“It’s just identifying it and treating it,” Schwab says. “If somebody doesn’t have proper coverage in place when they buy the business, we can add coverage that might be able to cover the historical exposures. We’ve gone back in time to provide adequate coverage to a buyer where maybe the seller didn’t purchase or account for the risk. There may be different risk appetites between a buyer and a seller.”
These speed bumps on the path to a deal can certainly be inconvenient. But they pay off in the long term.
“The takeaway is we can usually find an alternative solution, whether it be employee benefits, insurance or representations and warranties insurance, or something like that, to allow a transaction to move forward,” Schwab says. “But you have to do your homework. It’s something you want to make sure you have good visibility into and an effective forward projection that is credible and well-thought-out.”
Schwab’s goal is to help buyers not only understand the pitfalls of the programs they are inheriting, but also, when possible, create a value proposition for its new benefits program.
“How does insurance help you get a new contract? How does it help you grow the business on what would normally be a sunk expense for insurance, risk management and employee benefits?” Schwab says. “We want the program to be a value, to be attractive to the right kind of employee. We want you to be able to go sign new contracts for new projects because you have the right coverage in place. We’re trying to help people get better insight into their risk management and employee benefit programs.”
Jeff Schwab will be a moderator at ASPIRE 2019 on May 2 at the Renaissance Cleveland Hotel. His panel, Analysis on the Sell Side, will look at how to determine to whom you should sell your company — investors, strategic buyers, or even your management team. Use the code DEAL100 to save $100 off registration.