Case Study
“A general liability policy with the wrong exclusions can be worse than no policy at all.”
STRATEGIC ADD-ON ACQUISITION
The $100K EBITDA Adjustment
A specialty fire suppression business contacted us about a potential add-on acquisition. The deal structure was somewhat complex: the target was to be an asset purchase from an entity that would continue operating other business lines after close.
When we reviewed the target’s insurance program, two problems surfaced immediately.
How Our Diligence
Made A Difference
First, the rating basis was substantially understated. Insurance premiums for policies like workers’ compensation and general liability are calculated based on reported payroll or revenue. When those inputs are underreported, premiums are artificially low — but the insurer will eventually audit the books and send a bill for the difference. In this case, the target had received audit notices months earlier and simply hadn’t paid them: roughly $35,000 for workers’ compensation and approximately $80,000 for general liability.
Second, the general liability policy carried substantial exclusions—so substantial that it effectively did not cover the company’s primary exposure, which was fire suppression work. The seller’s policy looked like general liability on paper, but it wasn’t providing meaningful protection for the work the company actually performed.
Together, the unpaid audits and the cost of securing adequate coverage represented nearly $100,000 in EBITDA adjustments—on a business that went to market with $1 million in EBITDA.
The diligence process also revealed something harder to quantify but equally important: the target’s CEO, while a talented entrepreneur, did not have a clear understanding of what his policies did or did not cover. And the target’s insurance broker was fundamentally uncooperative—not someone the buyer would want to continue working with post-close.
The Takeaway
Unpaid audits and underreported exposures are hidden liabilities that don’t show up on a balance sheet. And a general liability policy with the wrong exclusions can be worse than no policy at all—it creates a false sense of security.
Evaluating a deal?
We work with searchers, acquisition entrepreneurs, and private equity sponsors to independently evaluate insurance programs before close.