An innovative new product, very similar to Representations and Warranty (R&W) insurance, is available now and will provide coverage for small, or “micro,” M&A deals.
Transaction Liability Private Enterprise (TLPE) insurance is available for deals with a Transaction Value of $250,000 to $10M.
London-based insurer CFC Underwriting is the company behind this innovative new insurance product, and with 230,000 deals in that range of TV, they decided to go after this underserved market.
While similar to more traditional R&W insurance, TLPE coverage differs in key ways, and not just in that R&W is intended for much larger deals.
One of the most noteworthy differences is that TLPE policies are sell-side only, which means they are triggered only when the Buyer brings a claim against the Seller because of a loss caused by a breach of the Seller representations in the Purchase and Sale Agreement.
Also, deals can be insured for up to 100% of enterprise value.
This is a very new product. Not many people have heard of it. But it definitely reaches an underserved market, and many Buyers and Sellers involved in micro-deals will get a lot of value out of it.
(If you haven’t already, I’d recommend you read my first article on TLPE insurance to get more of the basics about this unique coverage.)
Why Is TLPE Insurance a Good Idea?
Securing TLPE coverage is a no-brainer if you’re involved in a deal under $10M. TLPE insurance is new, it’s just launched. It’s meeting a big need out there.
And while this may be controversial… I’d say it’s as good as R&W coverage, if not better in some cases.
It’s better for Sellers, that’s for sure. Here’s why:
1, Availability
In professional sports, the greatest “ability” is “availability”. You may be the best athlete, but if you don’t show up on game day, your talents are useless to your team.
By the same token, R&W insurance is an invaluable tool. But it’s simply not available at any cost to the lower middle market transactions.
2. The Cost
The cost of a sell-side TLPE policy is less than a similar sized R&W policy, by as much as one-third. There are several reasons for this.
3. No Underwriting Fee
In addition to lower premiums, there is no underwriting fee for TLPE. These policies are underwritten by the Seller completing an application (just like any other insurance policy). Underwriters then use that application as a basis for evaluating risk. This method reduces the overall cost for the program by $35,000 to $50,000 per deal.
4. The Deductible Is Less
To further reduce costs, the retention, or deductible, for TLPE policies is significantly less than a traditional R&W policy. TLPE will feature deductibles as low as $10,000, all the way up to $100,000 for a $10M limit – that’s 1%. Compare that to R&W with a minimum retention of $250,000 to $300,000.
5. Lower Escrows and More Cash at Closing
The lower deductible enables Sellers to negotiate lower escrows, or withholds, with Buyers. This further increases the amount of cash Sellers get at closing.
6. Sellers Are Not Beholden to Buyers
With TLPE insurance, Sellers are not forced to ask permission of Buyers for protection from breaches of Reps and Warranties. In a traditional R&W policy, no matter how much the Seller wants it or thinks they need it for peace of mind, if the Buyer doesn’t agree to include coverage in the deal, it doesn’t happen.
The alternative in the past was a traditional sell-side R&W policy. However, the Underwriters on sell-side policies in these cases would not be able to rely on an application as they do with TLPE.
In fact, they would conduct even more stringent due diligence. This costs more and can even limit coverage because Underwriters are not equipped to underwrite R&W on that side. (In buy-side policies, they rely on the Buyer’s diligence.)
Sellers don’t need the Buyer’s input at all for underwriting a TLPE policy as everything hinges on the Seller’s input, not the Buyer’s. Seller’s seeking peace of mind can acquire it entirely independent of an uncooperative buyer.
7. The Short Timeframe
The underwriting time in TLPE is in most cases a matter of days, definitely less than a week. Compare this to the minimum timetable for traditional R&W insurance underwriting of two to three weeks from beginning to end.
8. Peace of Mind
The Seller has control of policy placement and coverage terms, which means they feel better knowing that whatever proceeds they’re supposed to get from the transaction… they are going to keep.
9. Legal Defense Costs Covered
A sell-side TLPE policy provides legal defense to help the Seller against Buyer claims. The lawyer for the policyholder (Seller), who will protect them and try to negotiate a lower settlement, is at the cost of the insurer, not the Seller. It’s built into the policy.
With traditional R&W insurance, even if there is a claim brought by the Buyer, the Seller would have to engage an attorney to respond to make sure they aren’t taken advantage of. In fact, the Seller usually isn’t involved – the Buyer is taking action against the insurer to get their claim paid.
But if the Seller has a $1M to $3M escrow they still need their own attorney for that piece of it.
Where to Go Next
If you have an upcoming deal under $10M, it’s clear that if you’re the Seller, TLPE is a must-have.
If R&W is Wall Street, then TLPE is Main Street. Insurers in this space want to insure mom & pop retail stores, franchise restaurants, small tech companies, or maybe a small manufacturer.
The cost is super low thanks to the three ways TLPE saves you money (lower deductible, no underwriting fee, more cash at closing), the process is quick and easy, and this new type of insurance offers a lot of protection to make sure you take home the proceeds you deserve from your sale.
All this being said, there is a key similarity between TLPE and R&W coverage:
The claims paying ability is no different between the two. You can count on great claims services with TLPE, just as you’ve heard about R&W.
I’m happy to speak with you about both TLPE and R&W insurance, whichever is most appropriate for your deal. It is important to work with a broker experienced in TLPE insurance when trying to secure this coverage as there are key conditions and limitations.
And one last thing about TLPE:
10. TLPE Policies Can Be Placed Post-Closing
This means if you did not get protection for a previous deal, and it is in that $250,000 to $10M range, it can actually be revisited if you’re interested.
To get more details on how TLPE might fit your specific deal, be sure to contact me, Patrick Stroth, at pstroth@rubiconins.com.