Selling & Creating Value Through Risk Management: Part 2

In my last article, I discussed things you need to know when you are selling your restoration business, as well as what happens from an insurance standpoint after you close. Now, let’s discuss what makes a restoration business more marketable and attractive prior to a sale. There can be things that influence a higher multiple even outside the numbers within your own insurance and risk management.

Safety Culture: 5 Ways to Improve

Safety is Priority #1. Whether on the jobsite, on the road, or in the warehouse, safety needs to be placed above everything. Timelines, productivity, and costs are important, but your team is the business’ number one asset. We can all agree everything always falls on leadership, so when your team knows safety is your number one priority, you can easily earn their trust and confidence. In the long run, when safety is first, it will increase your productivity and margins, which is a goal for everyone reading this. A good record will also reduce your insurance costs. Safety is not a gadget, but a state of mind.

Train, Train, Train. Investing in your employees through training is the simplest way to improve the safety culture. Consistency is key, as it shows your team you are committed. Have weekly safety meetings to help reinforce your company’s dedication to best practices. Be sure to keep thorough documentation of your training, where the team signs and dates every time. When your agent shows these training logs to the various underwriters at renewal, it will open you up to more credits being available and can reduce your premium as well.

Buy-in. You can tell when someone on your team is there just for a paycheck and treats it as a job, versus someone who truly cares about their work. When people buy in, and are involved and invested, you can get the highest return on your investment in them. Create a safety committee that includes team members from every level of the business. This committee will be responsible for keeping the safety manuals and programs up to date.

They should have job-specific safety plans for mitigation, mold, reconstruction, crawlspaces, duct cleaning, pack outs, trauma clean-up, COVID-19 cleaning, and pretty much every other service you are involved in. These should follow all the IICRC and industry-related guidelines, state, and federal laws. You should also create a corrective action plan with input from the team, and be sure everyone knows about it and it is being enforced.

Accountability. When you empower your team, it naturally creates accountability. Everyone needs to be responsible for safety, not just those in charge. Your safety rules need to be clearly defined, where there are consequences for failing to follow them. Encourage everyone to speak up and report others who do not follow safety protocols or even unsafe conditions.

Rewards. Everyone loves incentives, so you need to reward the good, not just correct the bad. Reward your team for following the best practices, such as proper use of PPE, attending safety meetings, and making suggestions to improve safety. Be cautious though, as there is a growing sentiment that incentive programs that only reward the team for going a certain number of days without an injury or accident leads to underreporting. Timely reporting is also important, because what may not seem like a big deal can explode into a costly claim. Still, encouraging and rewarding your team for being proactive will likely lead to fewer accidents.

Good Loss Experience

Earlier, I mentioned a good safety record would lead to decreased insurance premiums. For most restoration companies, insurance can cost anywhere from 1.5% – 3.5% of your total revenue, but this can be a lot higher depending on location, number of claims, and amounts paid.

If you have a lot of payroll and a high number of employees in the field, it is likely your workers comp is one of your highest expenses after payroll and taxes.

One of the easiest ways to kill your margins, which of course negatively effects your EBITDA, is having a high Experience Modification Factor, or Ex-Mod.

In insurance, it is well-known that frequency leads to severity. If you have a frequent number of injuries, your Ex-Mod will certainly go up.

If you are planning a stock sale, having a high Ex-Mod could deter potential buyers. Not only will it negatively affect the buyer’s future cash flow, but it shows them you do not have a culture dedicated to safety, which could indicate it may not be a team they should consider purchasing.

Do You Have Coverage for These 5 Claims?

There is a fine line between “coverage rich” and “insurance poor”; it ultimately comes down to your own risk tolerance. Of course, you want to decrease your expenses so you can get the financials looking strong, but you also don’t want an uncovered claim.

Those who take safety seriously tend to have lower insurance premiums, which often lends one to question, “what am I not covered for?” Here are some things to consider.

1. Employment Practices Liability (EPL)

With the ever-changing social and cultural landscape in the workplace, there has been a huge spike in businesses purchasing Employment Practices Liability. The #metoo movement really put things at the forefront, and there have been many highly-publicized employee liability lawsuits in the media. In 2019, the Equal Employment Opportunity Commission (EEOC), recorded nearly 75,000 charges of workplace discrimination.

Whether you have over 100 employees or even just a handful, you should have EPL. Unfortunately, I estimate not even 10% of all restoration contactors purchase this coverage as it is often not required by TPA’s or insurance companies. However, I have seen a few franchisors start requiring it recently.

If you do not have EPL, you are self-insuring for things like discrimination, harassment, retaliation, wrongful termination, misrepresentation, negligent evaluation, wrongful discipline, and wage/hour claims, just to name a few. The cost to settle out of court averages $75,000 and the average jury award is nearly $220,000 if you lose. These cases often take 18 to 24 months, which is a ton of stress and lost opportunity cost. This doesn’t just happen to the large corporations; roughly 42% of employee lawsuits are brought against private companies with less than 100 employees.

Cybercrime is up nearly 600% over the last few years.

1. Cyber Liability

The next coverage you need to consider is Cyber Liability. In recent years, there has been a huge uptick in phishing email schemes, malware, ransomware, and social engineering, where cybercrime is up 600%. Cybercrime will cost companies worldwide an estimated $10.5 trillion annually by 2025, up from $3 trillion in 2015.

Surprisingly, one-third of data breaches are the result of human error. A simple lost flash drive or laptop can be one of the costliest mistakes an employee can make. When it comes to your customers or employee’s information, lost is the same thing as stolen.

Laws vary from state to state, but most states have civil codes requiring businesses to notify customers whose unencrypted personal information was, or potentially was, acquired by an unauthorized person.

Think beyond customer data. Restoration firms may have proprietary assets, intellectual property, architectural drawings, and specifications, which make you a target for cyber criminals.

2. Employee Theft

While none of us likes to think a member of our team would steal, it is critical to make sure your business is protected in any scenario. Employee theft and fraud are common occurrences, as 68% of theft cases in the U.S. are in small and mid-size businesses.

Also known as employee dishonesty coverage, it can be purchased in a crime policy, or even endorsed in a property/inland marine policy. Over the years, I have seen

construction company employees steal tools and materials from the employer and then sell them online. I have seen bookkeepers write checks to a fake vendor, forge signatures, then deposit funds into an account they created.

One of the craziest claims was a former CFO stealing six figures over a few years, where he was forging and writing company checks to prostitutes. Luckily, the contractor had enough coverage and that person later faced criminal charges.

This is inexpensive coverage, where you may pay a few hundred dollars for a $500k limit.

3. Hired Auto Physical Damage

All the TPA’s require you to have auto insurance. You often need to have at least symbols 2, 8, and 9, meaning you need coverage for all owned autos, as well as hired and non-owned. For restoration contractors, hired vehicles are usually rented vehicles when you are traveling for tradeshows or performing CAT work out-of-state.

Non-owned coverage provides liability protection for the company if an employee is driving their own personal vehicle and gets in an accident. Think about someone in accounting running to the bank or one of your salespeople visiting with agents, property managers, or adjusters.

These coverages are important to have, but one area that can be overlooked is the physical damage for a hired or rented vehicle. This is not one that is talked about often, so be sure to ask your agent if you have it. You certainly do not want to have to come out of pocket if an employee totals a box truck.

4. Virus

There is no way that I could write this without bringing up virus coverage. Although there are not many requiring coverage if you are performing COVID-19 cleaning services, there’s a chance you would have zero defense if someone alleged they were sick from your lack of cleaning.

From the very beginning of the pandemic, we started going through all the environmental carrier’s pollution policies to see how this would be addressed. Know that in any insurance policy, the definitions are one of the most important sections, so we started with the definition of pollutants, only to find three carriers have the word “virus” within the definition. Within weeks, it seemed as though insurance carriers started putting COVID-19 exclusions or communicable disease exclusions in their policies.

Even nearly two years after everything began, there are only three carriers actively underwriting for COVID-19 cleaning operations. To get coverage, you need three things: procedures and protocols specific to COVID- 19, biohazard training, and a strong contract/work authorization specific to COVID-19.

Although things seem to be normalizing and you may be thinking there is no way to prove someone got sick due to your services, there is still the burden of proof. Know that if you do not have “virus” in the definition of pollutants, your carrier may not defend you in the event of a claim.

Putting It All Together

If you have a culture committed to safety, work hard to keep your loss experience low, and manage your risks by filling in coverage gaps, I believe you are going to set yourself up for a higher valuation.

Be sure you are working with an agent who truly understands your business, as they should be a trusted advisor who helps guide you through areas of risk, not just meet insurance requirement minimums.

Prepare and prevent, don’t repair and repent. The latter can end up costing you in the long run.