Why buy insurance for your deal?
M&A transactions are complicated and often fraught with risk. Small business sellers, especially those who are entering a deal for the first time, can be caught unprepared when their buyer brings a claim. Having fit-for-purpose insurance in place for your deal can be a lifeline when issues do arise.
Here are 4 key reasons why you should purchase M&A insurance to protect your deal:
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Your existing insurance won’t provide adequate cover
Many SME sellers will have E&O or D&O cover for their businesses, but they can be caught off guard when they learn those policies won’t protect them during the sale of their business. The most common misunderstanding is that D&O policies will cover breach of representation in a sale, which is almost universally untrue.
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M&A insurance is there to protect your proceeds
When selling your business, your buyer will likely demand that you provide representations and warranties.
If they assert a breach of a representation or warranty after the deal closes, you would be responsible for defence costs, as well as reimbursing them for the loss suffered if the claim is valid or settled.
M&A insurance is there to provide cover for indemnity and defense costs arising from a claim, protecting you from the risk of having to hand back some, or all, of your proceeds. -
M&A insurance can be used to replace your escrow
It is likely that your deal will necessitate an escrow so that, in the event a breach of the warranties or representations which leads to financial loss for your buyer, there is a pool of money is in place to claim against. These funds can be held for several years, which comes at a cost.
Having insurance in place can help you negotiate to remove this escrow. This is because your buyer knows that there is a fit-for-purpose policy in place, which means that their claim can be paid.
More importantly, this means that you can invest the proceeds that are otherwise tied up in escrow and reap a reasonable return over the same period. -
M&A insurance puts you in a stronger position to negotiate
Because your buyer can be rest assured that there is insurance in place to respond if issues do arise after the deal closes, this makes your business a more attractive proposition. In turn, you as the seller will have greater negotiating power.
If you have any further questions, please contact the transaction liability team at tlpe@cfc.com