In today’s highly competitive environment, innovation is often the key to survival for professional practices. Increasingly, consultancy firms working in the construction industry are looking to gain an edge on their competitors by offering clients a diverse range of services, spanning professions from engineering to architecture, as multi-disciplinary businesses.
Multi-disciplinary practices allow for collaborative working across disparate professions within a single business structure, with professional staff benefiting from their combined ‘in-house’ knowledge and shared use of resources and technology. Multi-disciplinary practices are attractive to clients looking to avoid the need to engage and manage separate consultants providing different professional services on their projects.
One of the most efficient ways for a consultancy practice to diversify is to purchase or merge with an existing practice which has different yet complementary professional expertise. If you are contemplating a merger with, or the purchase of, an existing practice, there are several issues which should be considered from an insurance perspective.
When should you inform your insurer about the merger or acquisition?
To comply with your duty of disclosure under your existing policy of insurance, you should advise your insurer of any material changes to your business, including acquisitions and changes to your corporate structure, at any time they occur during the policy period and well before those changes are implemented. Your insurance broker can assist you with what information is necessary to disclose.
What impact will the nature of the professional activities undertaken by the practice you are purchasing or merging with have on your insurance premium?
Professional activities are profiled differently by insurers as part of their risk assessment process. Some professional disciplines within the construction industry are viewed as having a higher risk profile than others, such as geotechnical and structural engineering. The risk profile of the practice which you are considering acquiring or merging with may affect the insurance premium terms that are offered by your insurer and higher excesses for higher risk activities may be applied.
What is the claims history of the practice you are acquiring or merging with and what is the practice’s attitude to risk management?
Comprehensive due diligence around the claims and notification history of the other practice is very important. Understanding the claims history of the practice you intend to acquire or merge with will provide you with an essential insight into the liabilities which the practice may be exposed to for its past work and may influence the preferred means for insuring that past work exposure following the acquisition or merger. The practice’s risk management philosophy provides you with an awareness of how complementary the practices may be and issues which may need to be addressed. The claims history of the other practice may also have an impact on your insurance premium, so it is very important to review and discuss it with your broker and insurer.
What is the best way to structure the merged entity?
There are many ways in which a multi-disciplinary practice may be structured. Always seek commercial legal advice in relation to the most appropriate structure for the new merged business. Once you have obtained legal advice regarding the preferred structure, speak to your insurance broker, as the type of structure/s that is used will affect the insurance advice that will be provided.
If your business is being acquired, what should you consider from an insurance perspective?
Make sure that the issue of ongoing professional indemnity insurance is dealt with in your negotiations for sale of the business. The acquiring business will usually require you to take out run-off insurance for 7 years which may come at a significant cost and impact your sale price. Sometimes it may be possible to negotiate with the purchaser of your business to cover your past exposure.
If you are interested in learning more about the insurance issues associated with managing a professional practice, please join us for an informed by Planned Cover webinar https://informedprofessionals.com.au/events-new/webinar-lifecycle-of-a-design-practice/ on 8 November 2018. Consult Australia members can purchase discounted tickets using the code CONSULT1.
Merging with or purchasing a business with different professional expertise can present exciting new opportunities for a professional practice. Whilst the insurance issues associated with such a merger may not always be at the forefront of considerations, failing to address the issue as part of your negotiations may leave you with unexpected exposures which tarnish an otherwise exciting evolution of your business.
Simon Gray, State Manager, Planned Cover & Natalie Sullivan, Risk Manager, Informed by Planned Cover (02) 9957-5700
- This article was originally published in Consult Australia’s Consulting Matters (Spring edition 2018)