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

  • A Close Look at Deal Drivers for 2023
    POSTED 1.26.23 M&A, TLPE Case Study

    When looking ahead at 2023, it’s clear there are economic headwinds out there impacting deal-making, including inflation and the threat of recession.

    Big tech companies are entering a period of austerity, with giants like Google and Microsoft laying off tens of thousands of employees recently. They over-hired during the pandemic, and they are now having layoffs.

    But I’d make the case that lower middle market M&A, especially with regards to tech, media, and telecommunications firms and business services companies, will see no slowdown in deals… In fact, there could very well be an increase in transactions in the coming year.

    Read More >

  • Alan Clark | Why This Major 2023 Prediction is Wrong
    POSTED 1.18.23 M&A, Podcast

    When your small business owner client is in a room full of MBAs, they can feel out of their depths…

    So how do you keep your client’s emotions in check during a high-stakes sale?

    Alan Clark is here to share his perspective as a sell-side advisor helping clients exit their businesses.
    Alan also reveals why he thinks a common 2023 M&A prediction is wrong—and weighs in on a new sell-side reps & warranties product.
    Read More >

  • Ken Heuer | How Core Principles Guide Your Thinking
    POSTED 1.11.23 M&A, Podcast

    In M&A, having a set of core principles to guide your thinking is essential…

    Ken Heuer of Kidd & Company is here to share the firm’s 3 core principles and how they make business decisions simple.

    We also discuss

    ● What Kidd & Company brings to the table for the lower middle market

    ● The emergence of a new reps & warranties product to protect sellers

    ● And more

    Mentioned in this episode: ● http://kiddcompany.com ● kheuer@kiddcompany.com ● https://www.linkedin.com/in/kenneth-heuer-6b16b3/

    Read More >

  • Step by Step Process for Applying, Quoting, Underwriting and Ultimate Placement of a Rep & Warranty Policy
    POSTED 12.21.22 Fiduciary, Insurance, M&A

    Step 1: There’s no insurance application. If needed, Rubicon will sign any NDA required by either party. We then required the following documents:
    Read More >

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