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Four Reasons to Use TLPE in SME M&A Deals
POSTED 5.11.22 M&A

Four Reasons to Use TLPE in SME M&A Deals

If you’re a sell-side advisor… investment banker, business broker, or an insurance agent… I have some news for you:

If you aren’t at least discussing Transaction Liability Private Enterprise(TLPE) as an option to cover an M&A transaction, you are doing your SME clients a serious disservice.

In many cases, these business owners simply don’t understand the risks they face, even after the deal closes or how TLPE coverage, which is offered by London-based CFC Underwriting, could protect them. They made be very good at what they do, but they are often not sophisticated about the intricacies of M&A.

There are four main areas of concern:

  • Escrow/Withhold amounts demanded by Buyers.

TLPE eliminates the need for large Buyer Escrows/withholds. Most Buyers require 10% or more of the purchase price to be held for a year or two to ensure there’s money available to throw at costs arising from breaches. TLPE policies are designed to replace the escrows, and with their lower retention levels, there’s no need for Sellers NOT to collect at least 99% of the purchase price at closing with no risk to the Buyer. I’ve personally placed policies(more than one) that reduced Buyers’ escrows by over $1M!

  • Many SME founders have the misguided notion that once a deal is done…everything is done and they have no further obligations.

Problem is that a Buyer can make a claim against a Seller up to six years later for an alleged breach of a purchase and sale agreement. You can’t run from your contractual obligations.

This can be very expensive if the Seller is found to have breached a Rep or Warranty in the sale contract. Expensive as in they’re on the hook paying the Buyer for loss incurred and legal costs. In some cases, they could be most, if not all, of the money they made from the sale of the company.

Having TLPE coverage in place provides protection.

  • One of the main risks in M&A transactions is a so-called innocent, or accidental, misrepresentation.

This is when a Seller makes an untrue statement about their company. They’re not doing it maliciously or willfully, so it’s not fraud or negligence. Yet, it is not true, which is a big problem.

How could an owner not know something so important about their business? In today’s quickly evolving regulatory environment, these “blind spots” can crop up.

Again, a misrepresentation like this can result in a claim that the Seller has to pay. With TLPE insurance in place, the insurer will pay the claim.

  • There is a myth among SME founders that M&A insurance is only for big deals. In reality, TLPE is the perfect insurance product for smaller deals, offering coverage for transactions under $10M in deal value.

TLPE coverage is easy to get, with no underwriting necessary. And the Seller is able to reduce their holdback. Retention with TLPE in place is only 1% of enterprise value or $10,000 whichever is higher. This helps the Seller keep most of the sale proceeds right after closing.

For example, I recently brokered TLPE coverage for a deal in which a sports apparel manufacturer bought a high-performance glove wholesaler for under $2M. The process took two days and cost just $20,000. The TLPE policy enabled the Seller to reduce the Buyer’s holdback from $140,000 to $14,000.

In another case, the owner of a $12M SaaS company was able to negotiate a $1M+ reduction on the Buyer’s escrow by securing TLPE, a savings of more than 10x the policy premium.

In short, TLPE, which was created to specifically protect small business Sellers, is ideal for SME owners.

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.