When acquiring another company, there’s no shortage of factors to consider. From valuing physical assets to estimating potential synergies, the due diligence process can be complex. However, one critical element often overlooked is the EMOD.

The EMOD, or Experience Modification score, is a workers’ compensation insurance multiplier that compares a company’s actual losses to expected losses. Contrary to popular belief, the EMOD is not tied solely to a single company, but rather to the ownership group above it. According to the National Council on Compensation Insurance (NCCI), “if the same person, group of persons, or corporation owns more than 50 percent of each entity, then those companies that fall under that common ownership will share the same EMOD.” In other words, multiple companies can share a single EMOD.

Once an acquisition is finalized, and common ownership is established, the EMODs of the acquiring and acquired companies are combined and cannot be separated. Therefore, it is essential to evaluate the target company’s EMOD before proceeding. Unfortunately, many companies lack advisors who emphasize this aspect during the acquisition process. As a result, the impact of a merged EMOD often surfaces only after the deal is complete.

Understanding the EMOD Score

Understanding the EMOD score of the acquisition target is critical. For example, if a company with an EMOD of 0.75 acquires a company with a higher EMOD, the combined score could rise to 1.25. This shift could eliminate discounts on workers’ compensation insurance and lead to premiums above the industry average, even if nothing changes operationally. In some cases, the company may be pushed into the assigned risk pool, incurring additional fees and surcharges. For contractors and companies bidding on work, a higher EMOD can also mean lost opportunities and jobs.

While the EMOD should not be the sole determining factor in an acquisition, it is a vital piece of information that must be considered. It is essential to understand its potential impact and adjust the valuation accordingly. Whether buying or selling, companies need advisors who can assess how the EMOD will affect insurance costs and overall financial performance.

M&A consultants and bankers are not trained to understand the EMOD or its implications. That is why involving an advisor who understands how an acquisition affects the combined EMOD, and can quantify that impact, is crucial. Doing so ensures a more informed decision, a successful acquisition, and continued growth.

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This is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.