Insights

Case Studies: TLPE and Indifferent Buyers
POSTED 10.12.22 M&A

You’re a small to medium-sized business about to be acquired by a much larger Strategic Buyer. You want some measure of protection during the transaction, and you’d prefer not to let a large portion of the sale proceeds sit in escrow for years in case some or all of it could potentially be clawed back if there is breach of a rep in the purchase agreement.

Where do you turn? Representations and Warranty (R&W) insurance is a potential choice. Trouble is that many larger Buyers have no incentive to bring an R&W policy, where the Buyer is the policyholder. They have the power and the leverage over their much smaller target. Why spend the extra time and money?

We call them “indifferent buyers.”

In addition, the value of many of these deals involving SMEs is much too small for R&W insurance.

But hope is not lost.

Enter Transaction Liability Private Enterprise (TLPE). This specialized coverage, which has only been available for about a year now, is specially designed to cover deals that Buy-side R&W insurance won’t. Deals at $30M EV or below are eligible.

TLPE insurance offers a Sell-Side policy where the Seller, rather than the Buyer, is the policyholder. In traditional R&W it’s usually the other way around. This means the Seller does not have to “ask permission” to secure this protection.

With this coverage, the Seller is able to reduce the amount sale proceeds held in escrow. Retention with TLPE is just .5% % of EV—or $10,000—whichever is higher.

TLPE policies are triggered when a Buyer brings a written demand for damages against the Seller. The insurer pays those damages; the Seller’s money does not get clawed back.

I saw this in action recently with a deal involving a California-based delivery staffing company being bought by a Fortune 50 retail organization.

This multi-billion-dollar major corporation, of course, had no interest in R&W insurance. But the Seller, who held 95% of the shares in the staffing company and was facing a $10M escrow, certainly did.

That’s where TLPE came in.

The Seller’s concern was protecting his $10M escrow. And despite being north of TLPE’s original $20M threshold for TLPE coverage, we were able to secure a policy for this Seller within two days.

But big Strategics aren’t the only indifferent buyers out there who are unfamiliar with TLPE, which, as I said, is a new kid on the block as far transactional insurance.

PE firms are familiar with R&W insurance…and also familiar with the cost. And often, to them, the cost doesn’t justify the risk. And if they’re doing say, an add-on for $30M, they may not want to invest the money in a R&W policy.

Again, enter TLPE, which is not dependent on what the Buyer wants or is willing to do. It is completely dependent on the Seller. Again, this is a Sell-side policy. And the Seller is able to secure this coverage without permission from the Buyer.

An important point to make here is that these indifferent buyers are not being adversarial. They’re just, well… indifferent. They have no incentive to secure transactional insurance coverage. It doesn’t make business sense for them. So, they don’t pursue.

But with TLPE coverage in play, Sellers have a very viable alternative.

If you have any questions or would like to explore the protection TLPE coverage could off you or your clients, please contact me, Patrick Stroth, at pstroth@rubiconins.com.

Case Studies: TLPE and Indifferent Buyers