M & A

M&A experts worldwide are using an insurance policy known as a Representation and Warranty (R&W) to transfer risk from the parties in a transaction to an insurance company. R&W policies are designed to, “step in the shoes” of a seller to pay indemnification claims made by the buyer for inaccuracies of the representations and warranties outlined in the purchase/sale agreement. Due to the low cost of R&W insurance, sellers are driving the demand for these policies rather than accept large, lengthy escrow or withhold terms. Buyers are discovering how R&W insurance can enhance their bid without having to raise their offer.

For the seller:

  1. An R&W policy replaces the indemnification provision and reduces the escrow to 1% or less of the purchase amount.
  2. Enables early and final distribution of proceeds to investors.
  3. Locks in the return and provides a clean exit as contingent liabilities are covered.
  4. Expedites the sale by getting the Indemnification issue “off the table”.

For the buyer:

  1. Distinguishes bid in a competitive auction, without raising the offer price.
  2. Eases concerns about collecting on seller’s indemnification.
  3. Preserves relationship with seller. In the event the seller is remaining with the company, the buyer pursues the R&W insurer, and NOT the seller in the event of a breach.
  4. Expedites the sale by getting the Indemnification issue “off the table”.

Underwriting & Placement Process:

  1. Secure information for underwriters:
    • Acquisition agreement (draft version is acceptable)
    • Seller’s audited financials
    • Seller’s disclosure statements (if available)
    • Offering memo
  2. Within 3 to 5 business days, a no cost, no obligation, non-binding indication (NBI) is provided.
  3. Due diligence process is commenced with selected market – requires payment of non-refundable underwriting fee.
  4. Conference call is arranged between the underwriters and the applicant’s attorneys.
  5. Final terms are issued within 2 business days of the final conference call.

POLICY BASICS

Limit Capacity – Up to $100M on a single policy. Excess capacity up to an additional $400M available as needed.

Retentions – commonly 1% to 3% of the purchase price. Reduces over time

Premium – 3% to 4.5% of the limits purchased (including taxes and fees). Minimum premium is $300,000

Underwriting Fee – From $25,000 to $35,000 in addition to the premium. Covers the cost of Insurer’s attorney’s fees and due diligence costs to review and manuscript a policy. Non-refundable.

  • Seller’s policy – checks how seller developed R/W
  • Buyer’s policy – checks how buyer vetted the Seller’s R/W

Terms – designed to match the survival period. Post survival extensions available upon request.

NEWS

  • 5 Predictions for M&A in 2019
    POSTED 2.13.19 M&A

    There’s been a lot of talk lately that M&A activity will trend downward in the coming year because of…

    • The trade war with China
    • Global economy slowdown
    • Rising interest rates
    • Trade tensions

    These factors do have an impact on the economy, but I think the impact on M&A specifically has been vastly overstated. It’s not hard to see why, when you consider those issues popped up in the last 60 days of 2018. It was overwhelming bad news in a short timeframe. It made people nervous.

    But, when you look at current real market factors, the same ones that made 2018 a banner year for M&A, you’ll see that the same conditions are projected for 2019.

    In the first nine months of 2018 alone, there were $1.3 trillion worth of deals for American companies. If you look at the worldwide figure – it’s $3.3 trillion.

    This is the most in the four decades that records of M&A transactions have been kept.

    There may not be a mad frenzy of buyers, because they have so many options for acquisitions. But especially for transactions in the $50 million to $300 million range, it’s going to be a good year.

    1. Plenty of “Dry Powder”

    Corporate America and private equity firms have plenty of cash on hand, popularly known as dry powder, and they’re spending it to increase their market share, obtain valuable intellectual property, and more. As of June 2018, there was more than $1.8 trillion in capital waiting in the wings, which is a record.

    Investors are also driving this trend, as when they give money to a PE firm, they expect them to buy something. Investing in other companies is a more efficient – and profitable – use of the money than sitting on it. That’s the attitude. And with so many attractive acquisition targets (see #4 and #5 on this list), who can blame them.

    2. Historically Low Interest Rates

    It’s true that interest rates have gone up. The Fed raised its benchmark rate to 2.5% in December 2018 and has announced plans to go to 3% in 2019. This is up from a low of 0.25% in 2008, at the kickoff of the Great Recession. It’s gradually gone up since then, starting with a hike to 0.5% in December 2015.

    But, when you look to the past, you’ll see that current interest rates are actually quite low in comparison. In 2007, the rate hovered around 5%. It was at nearly 10% in 1989. And in the late 1970s, early 1980s, rates were all over place, ranging from 8% to over 20%.

    Today’s interest rates are tame by comparison.

    3. A Buyer-Friendly Market

    The M&A market has been very seller-friendly based on macro issues, including the use of auctions rather than negotiated sales and an increase in private buyers. But this year things are going to even out, and may even tip to a more buyer-friendly market.

    It’s all that dry powder. Buyers have all this cash and are getting more favorable valuations for target companies. Something that was valued at five times earnings is, in this climate, valued at four times earnings.

    Another factor here is that Boomer business owners are ready to retire and looking for an exit. They’re ready to sell now. And Buyers know it.

    4. Companies Built for Acquisition

    More than ever, companies today are being created and carefully built for acquisition, not an IPO. I’m not talking about the headline-garnering acquisitions like Disney buying Lucasfilm for $4 billion back in 2012.

    The real heroes are those companies that get sold in the $50 million range. These deals just don’t get the press, even though they’re often very beneficial to investors and Sellers.

    Imagine two scenarios. In the first, you’re an investor in Uber, which is planning to go public later this year. Consider your return on investment with a small piece of the Uber pie and compare it to having a 40% stake in a small tech firm that gets bought for $50 million.

    In one recent case, a tech company was sold for $80 million. Husband and wife owned it 100%. They would have never gone IPO. But, by building a solid company, they were able to be acquired for a tidy sum. And with the proceeds, they were able to give $1 million to each of their 15 employees.

    5. More Solid Companies

    In the current market, more companies are simply well managed and well run, with professional and effective leadership. Management is given the resources it needs to be successful. And good ideas are supported.

    The days of the Dotcom era where companies were slapped together, investor money was thrown around freely, and “management” was a dirty word are long gone.

    This means there are plenty of solid companies with good financials and management teams out there, ripe for acquisition. And often management stays on in the transition.

    Looking Ahead

    All these factors provide a rich environment for M&A that is strong and sustainable. And there are more that I believe are contributing to an ongoing M&A boom.

    To get the full list, just get this free download:

    The 13 Factors Contributing to the M&A Boom

  • Insurance Almost Every Healthcare Business Needs, Especially for M&A
    POSTED 1.30.19 M&A

    There is an insurance product that almost every business in the healthcare sector and even individual providers needs, especially those that bill patients and payors (like insurance companies or the government through Medicare).

    It’s just as important as malpractice insurance. And, if you’re ever thinking about selling your dental practice, doctor’s office, or other medical business, it’s critical you get this coverage right away.

    It’s called Healthcare Regulatory and Billing Liability insurance.

    Even if a company in healthcare isn’t directly billing patients, they could still be at risk. Anybody providing resources to care for patients should be covered, and it’s not just those who provide care for patients directly.

    Read More >

  • Long-Term Trends to Watch Out for in Silicon Valley
    POSTED 12.12.18 M&A

    Where is Silicon Valley headed in 2019… and beyond?

    As with any forecast, you first have to look to the past and the present day to get a sense of what trends will continue, and what surprises we might find in the future.

    I recently sat down with Bob Karr, founder and CEO of business-focused social network, Link SV, to get his thoughts on what he sees as the most important trends that will impact the Valley.

    They run the gamut, from staffing to mergers and acquisitions.

    If you run a startup, work in tech, or invest, this is a must read to get an idea of fundamental shifts that are changing the way you do business.

    Acquisition Growth Strategy

    As Bob notes, some people these days are building companies to pass down to their kids; the classic family business. Others are trying to create major companies that they hope will grow big enough to go public…a unicorn like Uber, in other words.

    Read More >

  • 4 Factors That Impact the Cost of R&W Insurance and 1 That Doesn’t
    POSTED 11.28.18 M&A

    When it comes to M&A transactions, the relatively low cost of Representations and Warranty (R&W) insurance makes it a no-brainer for those Buyers and Sellers who want a smoother deal process, more money at closing for the Seller, and a third-party (the insurer) ready to pay out to the Buyer if there are any breaches post-closing.

    Right now, the cost of R&W coverage is a narrow range. The premium insurers will charge is 2% – 4% of the policy limit. And that number doesn’t appear to be going up anytime soon.

    Add to that the Underwriting fee, which is $25k – $50K (depending on the size and complexity of the deal) and policy taxes determined by the Buyer’s state of domicile, which can range from 3% – 7% of the premium.

    Read More >

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