When looking at options to cover a M&A transaction in the past, we’ve always said that you could either use traditional Representations and Warranty (R&W) insurance or… nothing.
Nothing would often be the case for deal sizes under $20M, where R&W coverage simply does not extend these days except in very special cases.
For many years, it was standard practice for Sellers in M&A deals with leverage to insist that Buyers forgo escrows as part of the terms of their deal and instead use Representations and Warranty (R&W) insurance.
However, there is a catch …
This process works only if the target’s pricing is above the Buy-Side R&W guidelines, which is $20M in most cases. And even then most insurers are reluctant to cover more than 30% of the purchase price.
Enter Transaction Liability Private Enterprise (TLPE) insurance.
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In insurance parlance, if you insure a particular exposure, you’re covered. If not, you’re bare. If you’re looking for a policy that covers something that’s never been covered before, you’re… naked.
That’s the situation many privately held, small, and middle-market companies find themselves in when they seek to sell their business.
The Buyer asks them to secure Directors and Officers Liability insurance (D&O), specifically a “tail” policy to make sure there’s a source of insurance coverage in case the Seller is held liable for any wrongful acts against an employee or others – things like human resources issues or fraud – committed before the closing date.
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