On it’s face, Representations and Warranty (R&W) insurance is a “seller’s tool.” After all, it allows sellers to walk away with more cash at closing, while keeping buyers’ interests protected in the form of an insurance policy against loss.
It’s clear why a seller would want it, in fact, sellers drive most of the demand for R&W insurance.
But a few smart buyers have found new reasons to employ R&W coverage…
In a typical transaction you, as a buyer of a company, want, and are right to demand transparency and thorough disclosure from the seller. The problem is that you never know how thorough or transparent the seller’s being…you don’t know what you don’t know.
So, naturally, you press the seller for guarantees—secured with hefty escrow deposits—“just in case.”
You and your legal team work hard to nail down every possible eventuality and get it plugged into the purchase agreement.
Often this means DOZENS of versions flying back and forth between your team and the seller, and sometimes contentious—maybe even heated—exchanges between parties.
Look…there’s a lot on the line for both parties, and the deeper you probe the seller (as you should), the more they feel like they’re being criminally investigated.
Let’s be honest, even the most detailed due diligence process isn’t bulletproof. If something does slip through the cracks you know you’re going to litigate over the escrow…and if the damages exceed the escrow, you’ve got to go chase the sellers. Even if you recover, what a distraction.
What if you could move all of that risk to a financially stable 3rd party—an insurance company—who will happily take it and jump-in to protect you (they’re contractually bound to do so) if an issue pops up after closing?
Here’s what happens to the deal process when you introduce a 3rd party like this…
Your due diligence needs to be thorough, but not ridiculous. Your purchase agreement needs to be solid, but you won’t have to negotiate every little representation to death.
Imagine the increased speed you gain in bringing deals to closing if you can cut the negotiation process by 75%. Imagine the reduction in deal costs…
And you have a stronger assurance of being made whole should something go wrong.
Best of all—the seller usually (happily) pays for all these benefits you get, because they benefit too. They’re going to get much more money at closing and will only have to agree to a small escrow to cover the deductible of the insurance policy.