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Case Studies: TLPE Insurance and Tech Companies
POSTED 10.5.22 M&A

There is a new R&W product taking the lower middle market M&A world by storm: Transaction Liability Private Enterprise (TLPE).

TLPE insurance is designed to fit a blind spot in deals that Buy-Side R&W policies won’t cover, specifically deals ranging from $1M to now $30M in enterprise value. Historically, these deals have been ineligible for traditional (R&W) coverage. Enter TLPE, which was innovated by London-based CFC Underwriting just one year ago, to offer protection for deals that are either too small or too expensive to justify a Buy-Side R&W policy.

This is a Sell-Side policy where the Seller, rather than the Buyer, is the policyholder. Makes sense as this coverage was created specifically to protect small business sellers. In Buy-Side policies the emphasis of protection is on the Buyer.

TLPE coverage is easy to get, with minimal underwriting required. And the Seller is able to reduce their holdback. Retention with TLPE in place is only .5% of enterprise value or $10,000 whichever is higher. This helps the Seller keep most of the sale proceeds right after closing—which they love, of course.

TLPE policies are triggered when a Buyer brings a written demand for damages from the Seller. And those claims are handled with the same expertise as Buy-Side policies.

TLPE is especially handy in certain industries, particularly tech.

As I said, this coverage has only been around for about a year. But, while this innovative product will still evolve and improve over time, it has already produced several success stories that I’d like to share:

The Online Dating App

Recently, a Fortune 100 publicly traded company was acquiring an online dating app. Such large corporations are not inclined to entertain R&W insurance in their deals. They have no reason to reduce the Seller’s risk. They have their own interests. They believe they’re buying a target at a premium—no need to add any extra expenses or risk sharing their diligence work product with insurance underwriters.

But the Seller wanted some measure of protection going into the transaction. They were worried about a potential breach to their intellectual property and cybersecurity issues. They did have a cybersecurity policy in place. but it only protected them for $2M. They wanted significantly more protection. That’s when they called Rubicon.

Even though the purchase price was quite a bit larger than the original $10M cap for TLPE policies, we were able to place coverage. It was a compelling case where the Underwriters were willing to look at the deal closely in order to make an informed decision.

They turned it around in two days, and we were able to deliver this client the protection they needed. Three weeks later, the deal closed.

One important thing to note is that this, special case, was only possible because this app company already had a cybersecurity policy in place, and had undergone extensive cyber diligence (including multiple penetration tests). Without this coverage, or the extra layers of IT diligence, Underwriters would not have been in a position to accommodate this client; however, this case shows the lengths the TLPE program can extend on a quality risk.

You should also consider that while the TLPE underwriting process is very efficient and streamlined, which keeps costs down, a deal will be subject to extensive due diligence in order to get the cyber exclusion removed.

For example, if there were any red flags or concerns that were picked up in the cyber security scan or penetration test, they will want to see that the target company addressed those deficiencies prior to closing. If they have the Underwriters feel it is worth the risk.

That is what happened in this first case study with the app company and the Fortune 100 company acquiring it.

More Data Security Concerns

In the second case study we have a small technology being bought by a larger Strategic Buyer. The target was very concerned about data security. Namely, while the purchase price was relatively small, they wanted to protect their earnout, which was almost as much as the sale price. That’s a lot of money.

But any breaches of the reps could jeopardize that earnout, which was basically half of what the Sellers were going to get in the deal overall.

That’s when we brought TLPE into the mix. They already had extensive diligence that the Underwriters could review. They decided it was a quality risk. In the end, because it was a sub-$10M deal, we were able to insure up to the purchase price. As before, the Underwriters turned their review around in two days, and the deal closed three weeks later.

For small tech companies like these with cybersecurity and IP concerns, R&W coverage just doesn’t work. But as you can see, TLPE has a big role to play.

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.

Rubicon – Case Studies: TLPE Insurance and Tech Companies