In this episode, Tom Gilroy, representing the fourth generation at GKG Risk, shares invaluable insights into the critical role of insurance due diligence in the process of acquiring a business and often-overlooked aspects of insurance in ensuring the long-term success and stability of an acquisition.
In this episode, Tom Gilroy, representing the fourth generation at GKG Risk, shares invaluable insights into the critical role of insurance due diligence in the process of acquiring a business and often-overlooked aspects of insurance in ensuring the long-term success and stability of an acquisition.
00:00:00 NICK LALL
the big question is this, how are entrepreneurs who aren't scaling tech startups or building lifestyle businesses from scratch doing it? How do acquisition entrepreneurs find businesses, buy them, and then create generational wealth while taking on less risk?
00:00:15 NICK LALL
to Search Funded, the entrepreneurship through acquisition podcast. I'm here today with Tom Gilroy of GKG Risk. GKG Risk is a risk and insurance advisor really focused on the search fund space. They've been voted New York's number one place to work, the top insurance employer in America, and they have received acknowledgement from the American Heart Association as a fit and friendly workplace. So I think maybe a good place for us to start, I would just for you to tell me a little bit more about what you do at GKG Risk and what services you offer specifically to search fund entrepreneurs.
00:00:48 TOM GILROY
Yeah, Nick, thanks for having me on. I'm proud to represent the fourth generation at GKG. So we are a family business actively growing in the tri-state area and now across the country. As it relates to search funds, we've directly helped searchers on their due diligence as they're vetting opportunities once they have a signed LOI, as well as helping searchers place and maintain their coverage moving forward once they close the deal.
00:01:14 NICK LALL
So at what stage in the process do you typically start working with search funds and what do you offer? Maybe if you could go to a little more detail on why it's important to partner with you during the due diligence and I guess further on when operating the business. Yeah,
00:01:28 TOM GILROY
Yeah, I think it varies. It can be as early as fundraising where traditional searchers are going through their PPM and they just want to talk about key risks are out there, things that they should warn about. But really, I start seriously talking to people once they have a signed LOI. You know, if a quality of earnings doesn't work, insurance diligence isn't going to matter. So I usually say, make sure you're doing that Q of E and you feel good about the deal. Once you have that confidence, that's where we will typically engage people to do a full review of what's existing and make sure there aren't any red flags or gaps before they close on the acquisition.
00:02:05 NICK LALL
Why is it important for entrepreneurs, especially search fund entrepreneurs, to work with an insurance partner?
00:02:10 TOM GILROY
Yeah, everyone knows they have to do due diligence on an acquisition, but insurance due diligence is criminally forgotten for whatever reason. So it's really important because you need to understand what you're buying. If you don't know what losses the company has experienced before, how can you know that it's a good business to buy? How do you know the policies are run up to speed? So part of it is just an overall perspective of doing the full diligence to make sure you understand the opportunity. And the other piece is how do you make sure you're not missing something that could cost you and completely blow up your model once you close on a deal?
00:02:48 NICK LALL
Yeah, I think it's definitely something that search entrepreneurs should start thinking about as soon as they start searching. It has a lot of ramifications during the search phase and beyond once they acquire the company.
00:02:59 TOM GILROY
Yeah, you know, and most deals are run the right way. So it might be that the seller didn't feel as important to carry a cyber policy or there were little gaps they have. But we've also seen it where sellers have completely misrated their policies and the cost tripled once an employer closed. So you don't want to be that person that has insurance costs triple. So, you know, for a little amount of effort, you can make sure you have the things up front. You know, I found additionally, that sellers aren't always forthcoming about claims that So for a little amount of you can make effort, sure you have the things up front. Additionally, I found that sellers aren't always forthcoming about claims that have happened before in the past. And so when you order these loss run reports and review them, it shows you every claim that was submitted. And usually we request a five-year period. So I've also seen it where a seller has said, hey, we're safe. We've had no issues. We looked at the loss runs and found that an employee walked through a trap door in the floor and shattered their hip and got a concussion. So we hope we find nothing, but it's one that you certainly don't want to assume as you're doing overall diligence.
00:03:59 NICK LALL
definitely important knowledge to have if you're going to buy a business. Do you have any other case studies or examples of how it's been really helpful for entrepreneurs to work with you?
00:04:10 TOM GILROY
Yeah. There's a lot of different scenarios out there. Another one that can come up is on workers' compensation, where the seller isn't properly reporting their payroll, or they're not tagging the class of work for an employee correctly. So that's one that we can see come up. But for the most part, I find that sellers have been running fairly safe businesses. They've been under buying insurance, but they haven't been reviewing their policies. So they've been doing what I call a sign and bind, where their broker just has them out for lunch once a year. They sign the renewal and keep things going. And when you only look at your policies once a year and your business changes, things can get out of whack. So oftentimes we find that there are savings for the buyer going into it when we market the policies and really tell their story. But those savings are netted out by properly investing in policies the seller might not have found. So I would say typically that's the case, but you do get the oddball where you can't believe the losses you're seeing, or you can't believe how the policies were rated and put into place. Definitely seems like working with
00:05:20 NICK LALL
providers is really important here. How's your business model work? If a searcher is writing their BPM up, should they budget for insurance due diligence or what would you recommend?
00:05:31 TOM GILROY
Yeah, what you find in our industry is there is absolutely work associated with the due diligence, but most of the people in the space aren't looking for a one-time fee. They're looking for clients that they can partner with long-term. So typically insurance diligence for us could be anywhere from $5,000 to $15,000 upfront, but we're willing to waive that cost if the buyer is committing to working with us on their program, if there's a successful close. So in terms of budgeting, if you're finding the right partner and willing to commit, it doesn't need to be an upfront expense pre-acquisition. Your policies at closing would actually pay the commission to the broker. So what I say is we're looking for clients that are looking to take over a great business and have a vision of how to take it from there, and they need a partner to work with. So rather than a one-time basis, we're really looking for people that want that partner and value the skill set of an insurance advisor. Right. Yeah. And it seems like you're
00:06:30 NICK LALL
like you're definitely in it for the longterm and looking at your website, it seems like you have a 98% retention rate. So
00:06:38 TOM GILROY
Yeah. You know, I think what we found is in our industry, it's highly commoditized. There are insurance brokers everywhere. And you so, know, as we've thought about it and as every searcher looks at a business, who wants to be in a highly commoditized area where all that matters is if you know someone and you have the best price. So for us to step out of commoditization and into really differentiating, we went to a proactive insurance model. And so what we said is rather than just show up and bind your renewal every year, we're gonna strategically work with you throughout the year, make sure it's proactive, make sure you're getting the best price, which is in turn gonna help the business. So it's just really for us about differentiating and making sure that we're staying ahead of everybody else. So for some businesses, that may not be important, but if you're a search fund going in trying to double, triple the business exposure, et cetera, it's going to be really important to work with someone that can keep up with you. Definitely. I guess
00:07:37 NICK LALL
gears a little bit, I'd like to learn a little bit more about your own business. You've been ranked highly for employee culture. So I was wondering what you would attribute that strong employee culture to, and maybe there are some learnings there that search entrepreneurs could employ cultural practices into their businesses.
00:07:55 TOM GILROY
Yeah, I think the same way that everybody wants to work where they can differentiate with clients, we want to show up and work at a place that you really enjoy going to. And so for us and for my dad, it's been critical to build a strong culture here because ultimately that's going to help us recruit the best people and make it enjoyable to keep going. So, you know, I've got a twin brother over at Google. And so we've stolen from some of the perks they have over there. But, you know, we have things like unlimited time off and we meet quarterly to make sure people are taking the time off so that it is something they actually take versus the trick to take less. You know, we're fully dressed for your day. We were doing that years ago. You know, we have annually, we call it a unique career planner where we're talking about what's your vision? Where do you want to go? What path can we help you on? So for us, it's just been a material focus of our business. And, you know, it's been great to pick up a couple of words to have it recognized externally, as well as with our team. That's awesome. Yeah. Makes
00:08:58 NICK LALL
me want to come work for you if I can't end up doing the search fund thing, but that's great. And I think what I really liked hearing was the last part about actually taking an interest in the career and what the person wants
00:09:11 TOM GILROY
Yeah. And for all these searchers going in, if you can't win over the team, you're going to be in big trouble with your overall business. If people don't buy in, how can you have success? So, you know, we're trying to make our team understand that each person truly matters and we want the best for them, whether that's with GKG or somewhere else. But, you know, there's been plenty of things as well. We're an EOS company and we found that that framework has really helped us, one, execute the business, but make sure everyone's voice is heard. So, you know, another thing is, is we do a Colby assessment, which is a behavioral test for every employee on their way in. And it's something that's on your name tag. So we're investing in helping people figure out what's their personality and how can they better work with their teammates. So it's not one silver bullet, but it's been a priority for us every single year to keep focusing on.
00:10:05 NICK LALL
Yeah, that's really smart. If you're acquiring a business, you should also maybe do a HR due diligence where you give these sort of personality tests and so on to the employees just so you understand things a bit better. Yeah,
00:10:16 TOM GILROY
sometimes it's spot on and sometimes you're amazed at how wrong you were about somebody. Right,
00:10:21 NICK LALL
Right, Totally. Yeah. Yeah. It's very helpful to actually understand how people's mind works because it can come across very differently sometimes. Speaking of the insurance industry, should surge funds consider the insurance industry for acquisition targets and what would be indicators of a good acquisition in this industry?
00:10:41 TOM GILROY
Yeah. I think our industry has been tough because private equity found it over a decade ago and people have been very successful. So multiples have skyrocketed. And most times in the search fund model, people are looking for that sleepy business where multiples are lower. So I think a lot of searchers have been priced out of the insurance agency market. But at the same time, there's a tremendous amount of activity in insure tech in the services that work with agencies. So, you know, if there's an opportunity to get in early, absolutely, the insurance agency side can be a wonderful business. And then there's a lot of businesses around us, especially technology oriented that searchers could be taking a look at as well.
00:11:25 NICK LALL
How's the changing landscape of the insurance industry with all this innovation with InsurTech affecting GKG? Are you paying attention to that at all? And is it changing the
00:11:34 TOM GILROY
the way you do business? Yeah, I mean, InsurTech is huge and the insurance industry has traditionally been slow. So there's still people that are faxing in documents to carriers. And, you know, online bill pay is a revolutionary technology. E-signatures are a revolutionary technology. So we're absolutely embracing it because we think we need to, to stay par with everybody else. But, you know, I've certainly seen the industry switch from very local, you know the person, your community, your best friend, to more, do you have the technology to support us? Are you up to speed? Can you get us the best access? So I'd say it's shifted from more relationship-based to more of that, again, how can you differentiate between your strategy and the platform that you have? So yeah, if you're not keeping up, you're going to fall behind in this space. Like many industries, I guess, but yeah, that makes sense.
00:12:30 NICK LALL
time we talked, you had the opinion that search fund businesses should not sell to private equity. I was wondering if you could expand on that a little bit. Yeah, I think
00:12:38 TOM GILROY
I think what I said was, why let somebody else have all the fun? So if you're a search fund and you're planning an exit, you certainly can't, you shouldn't just change your mind on that without talking to your investors. But as we think permanent equity is the sexy term, it's gotten a lot more popular. If you see a path to increased revenue, increased margin, and you feel you can execute it, my take is why let somebody else have that fund? Why let them recognize the value when you have the skill set yourself? So I've certainly talked to a lot of search funds that have gone from, I would say, more of a PE three or four year hold and flip model to we're looking at the long-term trying to hold this over eight to 10 years and then exit. Because again, if you can execute, there's a tremendous amount of additional value that you can capture in that second half where people have sold quicker in the past to lock in their return. So private equity is definitely not a bad alternative. I just think for searchers, if you can execute the path, why let somebody else have all the fun? Totally.
00:13:46 NICK LALL
Yeah. Holding an asset longer, you'll benefit from the compounding and can
00:13:47 TOM GILROY
an asset
00:13:50 NICK LALL
actually more attractive that way if you're able to do that and keep going. Makes sense. When it comes to exit strategies, if you are going to exit, what are the most important factors a search fund business should consider?
00:14:03 TOM GILROY
Yeah. When you're exiting a business, I think buyers want something that they can easily take on and grow. So if things have been lingering and you're saying it's going to be somebody else's problem, it's probably going to come out in due diligence. So, you know, I think buyers are looking for all the same things that searchers are as they go to buy a business. Has it been successfully run in the past? Where is the opportunity to keep going? Is the EBITDA sustainable or is the business just bleeding money? So it's going to be at a larger scale if we're selling up at the next level. But I think buyers are looking for, again, a profitable, But
00:14:51 TOM GILROY
Sure. Yeah, it makes a lot of sense. I think the other thing there, and we see this with every searcher, is buyers want businesses that can run on their own or with somebody that they can put in. And so if you as the searcher suddenly become the key person the business can't run without, it's going to make it tough for somebody else
00:15:08 NICK LALL
Right. I guess a lot of the parameters you're looking for as a searcher, you should also apply to when you're actually selling it. I guess one last question I have is, can you provide some practical ways that search fund businesses can manage risk and when it comes to drafting and what are the key elements that should be included in that regard?
00:15:25 TOM GILROY
I think for every searcher on insurance due diligence, the easiest thing you can do is request what policies are in place today in a five-year loss run so that you can see what's come up before. If you do nothing else, those two pieces of review are going to help you tremendously going forward in your business. The other thing I would say is don't be the stereotype of sign and bind or set it and forget it. It's like going to the doctor. Every year you should be proactively saying, what are the top risks our business is facing and what are the ways that we can either proactively address them and or buy insurance policies that could protect against the downside. So when you come in and you're actively charging on your business, don't forget about insurance. Make sure you have somebody you can trust and make sure you're continually talking about it as you grow.
00:16:17 NICK LALL
advice. Thanks so much, Tom, for joining. All searchers should be looking more into insurance and how to approach their acquisition with that in mind. So thanks so much for joining. I think this will be a really helpful podcast for a lot of people.
00:16:30 TOM GILROY
Yeah, absolutely. Happy to help in any way I can and always rooting for anybody that gets into the search fund and is taking a huge bet on themselves. And
00:16:37 NICK LALL
how can people
00:16:38 TOM GILROY
find you online? Yeah, people can find me on searchfunder.com under Tom Gilroy. They can email me at tomg at gkgrisk. And they can also find us via our website. So I'm sure we'll throw a link in the podcast here and make sure everybody has my info.
00:16:55 NICK LALL
so much.