Representation and Warranty Insurance

Did you know…

That insurance can be just the thing to help you close your M&A transaction?

by Elizabeth Davenny

Representation and warranty insurance is being used a lot more frequently and what was once offered by a few insurance vendors for very large transactions, with big exclusions and lots of lead time is now a robust, streamlined, efficient process available in deals of many sizes and shapes. According to the 2019 ABA Private Target Mergers and Acquisitions Deal Points Study, fifty-two percent of transactions from 2018 and Q12019 included recourse to a rep and warranty insurance policy (up from twenty-nine percent in 2016/2017).

As a seller, rep and warranty insurance will let you walk away from the sale of your business with more money in your pocket up front, and with greater certainty that you’ll be able to hold onto it – rep and warranty insurance can significantly reduce or eliminate an escrow or your liability for indemnification obligations! You may even be able to lower your transaction costs with less negotiation over the representations and warranties you make about your business because the ultimate source of recovery in the event of a breach is the insurance policy.

Acquirers benefit too – leading with an offer that incorporates rep and warranty insurance will allow an offer to stand out from otherwise comparable offers. Further, you can price higher amounts of coverage in certain key areas to the target business, allowing you to “right-size” your coverage for the relative risks of the industry. And with the insurance policy as the ultimate recourse, there’s no need to chase handfuls of securityholders to claw back proceeds.

Rep and warranty insurance policies can be issued in as little as 7-10 days. Whether you’re a seller or acquirer, you’ll generally want an acquirer-side policy in place to get the most benefit, but who bears responsibility for the premium and any retention amount can be negotiated between seller and acquirer – often, both are split by the parties.

As with everything around a sale or acquisition, details matter and you’ll want to discuss thoroughly with your advisors whether rep and warranty insurance is for you. If so, the benefits are significant—and that’s a good thing to know!

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