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Don't Overlook Your Experience Modification Factor In Your Due Diligence Analysis

Updated: Jan 5, 2022


Twice in the last year I’ve worked with clients who came to me with similar experience rating problems involving the sale of a division. In one instance - let’s call it Company A - a client bought a division of another company. In the other - Company B - my client sold one of their two divisions.

Generally, a company’s “experience” follows it. When you purchase a company or division of another company you are, in many circumstances, acquiring it’s claim history, payroll history, and classification history; for better or worse. That history can be incorporated into your existing experience modification factor (Mod). A company that sells a division can likewise lose that experience from its own mod and receive a revised mod minus that history.

Company A, as stated, bought a division of another company and started operations, in their minds, as a new entity. However, once NCCI (the rating bureau who produces experience modification factors in most states) caught up and issued it’s ownership ruling, Company A had its own mod. And, it wasn’t good. The division purchased and formed into a new company had a very poor claims history. And now Company A has work comp premiums significantly higher than anticipated.

Company B had two divisions and the owners decided it was time to slow down and downsize. The larger and more time consuming of the two was sold, and this should have been a good fit for their lifestyle. However, while their mod was pretty good (just under a 1.00) the division they sold had most of the payroll and very few of the claims. After the transaction it took NCCI a little while to catch up and issue its ownership ruling related to the experience mods. Once they did, though, Company B got clobbered. 

Company B was punished in two ways. First, their premiums skyrocketed for their remaining business. And, second, they are in an industry where you have to submit your mod for new business proposals and contract renewals. Since the new mod was significantly higher than what is generally acceptable to developers and general contractors, they are now in jeopardy of losing a considerable number of existing customers.

Keep in mind that the outcomes of ownership rulings can vary depending on the circumstances of these complex transactions. But, part of the due diligence performed should include potential impact on the acquiring company’s mod. And, if you’re selling, it’s wise to do your own analysis to see how the mod of your continuing operations may be impacted as well. Most of your brokers have the ability to produce test mods for this analysis as part of your due diligence prior to a transaction.

You could very well prevent additional costs or uncover extra savings.

Stuart Cytron, MBA has been published in trade journals such Construction Forum St. Louis and St. Louis Business Journal among others. You can read more about Stuart and how he developed a passion for helping businesses reduce work comp expenses on his website.

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