Imagine the subtle grin on your client’s face as you tell them how you’ve managed to improve the terms of their deal by a few million dollars…
You’d have a happy client, wouldn’t you?
And, if you could do that for all of your clients, I’d bet that word would get around.
If you could do that, without adding any cost or complication to your world, you’d do it on every deal, wouldn’t you…?
Having this capability in your arsenal allows you to give value on “Day Zero” of every new client relationship. What is adding value on Day Zero? It means that before a client even begins an engagement with you, you’re able to deliver tangible benefits.
So, how can you do that?
In M&A, simply introducing the idea of using Rep & Warranty Insurance in the transaction will improve the terms of the deal for both parties. There’s zero upfront cost, and it takes almost no time to determine if, and how, R&W might improve the terms for your clients.
R&W is a policy designed to protect the parties of an M&A deal by covering a Buyer’s financial loss that might result from a breach of the Seller representations and warranties. R&W is a unique form of insurance that transfers the indemnity obligation from the Seller to an insurance company, which has much deeper pockets to pay claims.
This transfer enables Buyers to eliminate the concern of having to “drag the Seller into court” for recovery – or worse – endure an uncomfortable legal process against a newly acquired partner. Even before a deal closes, Sellers benefit from lower escrows, reduced indemnity exposure, shorter, less contentious negotiations and lower legal expenses. Here’s how:
Under an insured deal, R&W policies pay the Buyer their loss above a stated policy deductible – commonly amounting to 1% – 2% of the overall transaction value.
Compared with a typical escrow that runs 8% – 10% of the transaction value – the lower R&W policy attachment point eliminates the need for the Buyer to hold any more of the Seller’s money above the 1%-2% transaction value deductible threshold.
Just by bringing R&W to the table, Sellers will pocket 6% to 9% MORE of the transaction proceeds AT NO COST TO THE BUYER.
(Imagine, how your client will react when you tell him or her that you’ve figured out how to put 6% to 9% more in their pocket on closing day.)
The presence of R&W speeds up negotiations. Each rep that Underwriters agree to insure (their goal is to insure ALL reps) is one less term to be negotiated back and forth by the attorneys. Fewer terms requiring negotiations leads to faster, less contentious discussions.
In the event there is a disagreement with indemnity caps, R&W can “step in” and insure the entire cap without the Seller increasing their exposure or the Buyer sacrificing safety.
Getting a preview is free. There is an Underwriting fee ($25K-$50K) for a formal policy to be structured in time for closing; however, the lion’s share of the cost – the premium – isn’t paid until the deal is DONE (i.e. closed). So, all the time saved, additional funds agreed, stress avoided and expenses reduced are realized BEFORE the premium is due – thus benefits are realized on BOTH sides of the deal on “Day Zero”.
Who pays? As with all deals, leverage dictates who ultimately pays the premium. We’ve seen Sellers eagerly pay thousands in premium to by-pass multi-million dollar escrows. Other times, Buyers gladly offered to pay the premium to win or (under ideal situations) pre-empt an auction. The current trend is where the premium is split evenly between the parties.
What happens when there’s a claim?
Under the “old way”, Buyers settled losses by seizing the Seller’s escrow funds, then demanding further recovery from the Seller up to the indemnity cap, usually through litigation. With R&W in place, the Buyer submits notice of the breach and corresponding financial loss directly to the insurer for recovery. Losses under R&W policies are paid years before uninsured breaches are ultimately settled.
Based on feedback from R&W policyholders, insurers have consistently demonstrated they are extremely unlikely to deny or contest a policyholder’s legitimate claim.