Insights

It’s Never Too Late for TLPE
POSTED 6.29.22 M&A

It’s Never Too Late for TLPE
I was at a conference recently talking with an M&A advisor. One of his clients sold his RV park for about $10M a few months prior. But, he was getting nervous that he has money withheld from the purchase price, in escrow, in case of a breach of the purchase and sale agreement.

Neither this advisor nor the Seller knew about Representations and Warranty insurance (which, by the way, is not available for a deal of this size).

And, considering this transaction took place in March before it had really gotten traction, they had not heard of Transaction Liability Private Enterprise insurance (TLPE).

TLPE, as I told this advisor, would actually be perfect for a transaction like this as TLPE is designed for deals under $20M. And, even though the contract was already signed, it was not too late to put this coverage in place.

First, a quick rundown of what TLPE is.

Unlike traditional R&W insurance, TLPE is a sell-side policy where the Seller, rather than the Buyer, is the policyholder. The policy is designed to be triggered when the Buyer makes a claim against the Seller. Instead of going after the Seller directly, the Buyer simply collects from the insurer. Easy.

Think of TLPE as a simplified version of R&W coverage that can be placed in days rather than weeks at a fraction of the cost.

And as I said, it’s never too late to think about TLPE.

Let me set up some scenarios:

1. If you are within days of closing a deal, have a conversation with a broker like us experienced in TLPE. Generally, we can turn around a proposal for coverage in two business days. All that’s needed is an application, the target’s financial statements, and the Letter of Intent (LOI). If the deal is eligible, terms can be available in one or two days; two days if underwriters need clarification on items.

See… even as you are walking to the altar, so to speak, it’s not too late.

2. If the deal is already closed, you can still get protection. However, it’s important to understand that coverage starts when you get the policy, provided that as of that date that coverage is placed, the policyholder didn’t know anything about a breach.

If the Buyer, let’s say, sends a registered letter or demand comes in and the policyholder is aware of the issue, no TLPE policy can be applied.

So it’s clear that TLPE coverage can be placed in the last stages of a deal or even after a deal has been closed.

However, there are advantages to getting in as early as possible. The earliest you can secure a TLPE insurance policy is when there is a signed LOI.

· This gives the Underwriters enough information to outline the terms and allows them to be integrated into the final purchase and sale agreement in the indemnification clause. In this case, the remedy to the Buyer in case of a breach will be the TLPE policy and the insurer rather than the Seller. The mechanism for notifying the insurance carrier may also be included here.

· Making sure TLPE insurance is part of the conversation between Buyer and Seller early on helps ensure that post-closing relations between parties are well-established and friendly. Plus, some Buyers, especially Strategic Buyers, may be resistant to carrying insurance rather than cash-in-escrow. Having time to explain how TLPE coverage works—and that claims do get paid without trouble if need be—can be useful.

Think of it this way, if you have a deal coming up in the sub $20M EV, TLPE could very well be a good fit. But don’t wait, get the process started now.

It’s like cramming for finals in college. You could stay up the night before the test studying and probably get a decent grade. But, if you know the final is on a certain date, why not prepare now and avoid all the drama.

I understand TLPE inside and out. As this new insurance product has rolled out, it is becoming a go-to for many of the smaller deals out there.

Please contact me, Patrick Stroth, for more information on TLPE and other M&A insurance options.