Growing Pains

Kate McGinn

As is the case with many industries, the waste sector is seeing its share of mergers and acquisitions. With a healthy economy, many waste firms are enthusiastic about growing their businesses by strategically merging with or acquiring other companies. However, that enthusiasm could be quelled very quickly if a merger or acquisition is handled with blinders on.

The risks of buying another firm are many. Such a transaction presents concerns about the physical assets that are being acquired and risk management needs that are best addressed by insurance.

Simply put, insurance transfers risk, especially where property is concerned. In a high-risk industry like the waste business, specialized insurance coverage can allay concerns held by both the buyer and the seller, while offering protection to lenders and other parties involved in the transaction.

Take, for example, environmental liability concerns that could easily railroad a business transaction. Many businesses don't know how to handle their own environmental liability issues, much less take on someone else's. This is a caveat that the waste industry has had to deal with for many years, earning it more experience than other sectors.

From banks to manufacturers to real estate brokers, businesses acquiring property want to ensure that they do not acquire environmental headaches in the bargain. Thus, they insure the environmental condition of the property that is changing hands. Transactional environmental insurance policies are effective in covering the transfer of property and quelling fears about the environmental condition of properties being purchased.

Waste firms also need to consider the potential risks associated with acquired business practices. Many aspects of the acquired operation, including employees, attitudes and procedures, may fail to meet the purchasing company's standards. For instance, many waste haulers expand their areas of operation by acquiring companies with desired routes or areas of service. Are they aware of the risks associated with those particular routes? A thorough investigation into a business prospect's day-to-day operations and culture is the only way to uncover, and thereby manage, some of the risks present in a new acquisition.

When buying another company, there is a temptation to rely on acquired employees, including drivers who are familiar with the acquired routes, to keep the merged operation running smoothly. But is the acquiring company familiar with these employees, their driving records and their previous training?

Employee training, driver selection and safety management all are practices that needs to be considered before taking on another company's potential liabilities. If the company being purchased does not have high-quality risk-management programs in place, it does not have to be a deal-breaker. However, the buying company should have a plan in place to assimilate their risk management practices into the acquired company or a means to reinforce the acquisition's existing programs.

Another overlooked risk management consideration is the adequacy of a merged company's liability limits. Failing to increase your insurance coverage to accommodate a growing business can lead to trouble. A waste company that runs a “tight ship” in terms of risk management might purchase a company with less stringent standards. While the intention may be to have the newly acquired firm adopt that strict attention to risk management, such a transition takes time. In the interim, the acquired company may pose a significant risk that can result in quick losses, which eat into the company's limits of liability.

Every company wants to grow. The effective approach is to consider all the risks involved and find risk management strategies that can ensure that a growth opportunity truly is a growth opportunity.

Kate McGinn, XL Specialty Insurance Company www.xlinsurance.com