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.
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.
Terms – designed to match the survival period. Post survival extensions available upon request.
Globally, M&A activity so far has declined 23% in 2022 compared to 2021. Yes, that is a significant drop. But, as I wrote in a previous article, you must consider that 2021 was a historic record-breaking year of deal-making. So, in a sense, 2022 has been somewhat of a return to normal.
That said, while worldwide M&A activity has declined, what we’ve seen in the U.S. is little or no decline in deal-making. It’s essentially “flat.”
This is largely because of the increasingly common practice of purchasing “add-ons” instead of platform companies.
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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.
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As we exit the first quarter of 2022, all the buzz is around the slowdown in M&A activity.
It’s true that deal activity in the beginning of 2022 is a drop from Q4 2021, as well as a drop compared with Q3, Q2, and Q1 of 2021 because there was so much pent-up activity as pandemic closures waned.
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D&O Liability Coverage Versus TLPE Insurance
As I’ve written in the past, there are many founders of small- and medium-sized, privately held companies that simply don’t see the need for Directors & Officers (D&O) liability coverage.
I won’t argue the merits of D&O insurance here.
But, the reality is that when those owners try to sell their companies, that lack of coverage will come back to bite them.
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