Mergers & Acquisitions – Representations and Warranties Insurance

Mergers and acquisitions are common in today’s market, and M&A insurance is increasingly expanding. Modern business insurance now covers representations and warranties made by the seller during a business buy/sell process. It’s done through R&W insurance, which protects buyers from breaches of representations and warranties made by the seller during the M&A process.

This specialized form of business insurance is becoming more prolific as buyers and sellers continue learning the benefits of this coverage. This guide provides an overview of the most important points to know.

What Is R&W Insurance?

During mergers and acquisitions, contractual terms are set to include caps, exclusions, and time limits in which the seller indemnifies the buyer for breaches. Business indemnity usually consists of an escrow payment of 10-15% over the course of the first year, but R&W insurance is increasingly replacing this section in today’s business buy/sell.

With R&W insurance, the insurer pays a much lower premium (typically 2%-3%) and underwriting/broker fees to have a third-party insurer cover losses up to ~10% of the M&A price. Like any insurance plan, there are deductibles, limitations, and exclusions of coverage. While both the buyer and seller can use this business insurance, most insured are buyers.

Benefits of R&W Insurance include:

1. Cleaner Exit for Sellers

M&A closing costs can drastically reduce and delay the sale proceeds for the seller’s shareholders. Traditional business indemnity clauses leave contingent liabilities in place while funds are held in escrow to cover them. This leaves sellers waiting up to two years in many cases for access to funds from an exit. All the while, they’re paying attorney’s fees and other associated expenses.

2. Better M&A Protection

R&W insurance can be customized to fit any coverages or durations the buyer needs. Like an extended warranty or service plan on a car or home, this form of M&A insurance goes above and beyond protections the seller would otherwise agree to. It can sometimes take a while for a buyer to uncover issues after the sale.

3. Faster Mergers and Acquisitions

Because a major negotiating pain point is removed from the M&A process, it goes faster with R&W insurance. Removing (or reducing) escrow holdback makes bids more attractive to sellers, and they’re more likely to agree to more extensive representations and warranties knowing there’s R&W insurance in place. This more efficient process also applies to the claims process, should the buyer need to file one.

The entire deal goes much smoother from end-to-end for both parties when at least some of the burden of business indemnity is carried by a third party to the business buy/sell. This removes tension during negotiations both leading up to the sale and post-sale, as caveats and conditions are often debated intensely.

Obtaining R&W Insurance for an M&A

Both buyers and sellers should understand R&W insurance is a supplement to the mergers & acquisitions process. It’s not a full-on replacement for the due diligence and structured deals created during a private business buy/sell transaction. These are complicated deals that need to be deeply researched by both parties and the insurer too.

Strategic buyers looking for business insurance in a structured deal will benefit from R&W insurance. Sometimes it’s done prior to the sale. Buyers are increasingly using references to R&W insurance in their term sheets. This helps make M&A offers more enticing for sellers, by focusing on how it can reduce liability and time frames involved to maximize proceeds from the sale.

Other times, R&W insurance is implemented during the sale process. Buyers and sellers can negotiate who pays insurance premiums, retention/deductible amounts, liability details, and defining terms. Intellectual property, taxes, and other factors should be considered. It’s important for both parties to read all clauses and riders before agreeing to the terms of the acquisition.

At Valor Insurance, The Snipes Group, we specialize in R&W Insurance. Contact one of our qualified insurance brokers today to learn how we can insure your next business buy/sell.