Is M&A insurance right for my deal?
Many SME business owners who are looking to exit their businesses may be unaware of the potential liabilities arising from their sale, as well as the full extent of cover available to them when they strike a deal with a buyer.
Representations and warranties (R&W) insurance has not been available to small and micro M&A deals, and CFC is the first to fill this gap in the market. To highlight the true value of insurance for sellers and to provide some insight into why it makes sense to buy insurance on a deal, here are five reasons why an SME M&A policy may be the right solution for your deal.
This is your first / only M&A transaction
If this is your first time doing an M&A transaction, you may not be aware that your buyer will require you to provide certain representations about your business (the seller representations). These representations cover everything from compliance with laws and regulations, to tax matters and even your financial statements among others.
If a representation is proven to be inaccurate, even if by accident, as the seller you’ll be responsible for reimbursing the buyer for the loss they have suffered as a result. This reduces the proceeds you earn from the deal. Most first-time sellers aren’t aware that insurance now exists to provide cover for this exposure. R&W insurance can provide peace of mind that you as the seller will be protected in the event any of the representations you give turn out to be wrong.
You’re looking to retire after selling your SME business
You may find yourself in a position where you’ve successfully grown your small business and decide to cash in on your hard work by selling to a financial sponsor or new investor. Whether you are looking to retire or invest using the proceeds of your business sale, we understand it is vitally important for you to realize the value you worked hard to build.
When selling your small business, you should have complete peace of mind that your proceeds will be protected. Unlike traditional R&W policies which typically provide a policy limit of 10% of enterprise value (EV), our M&A policy - tailored to SME deals - can cover you for the full indemnity given by the seller in the sale agreement, up to USD 10m. This minimizes the risk of having to hand back some, or all, of your proceeds as a result of an innocent breach of contract.
Breach of sale contract is not typically covered under management liability
You may think that your management liability policy will offer you protection for the risks connected to your deal, but it can only go so far when you’re selling your business. Most management liability policies exclude losses arising from contractual breaches, meaning that any losses arising specifically from a breach of a representation given by the seller will not be covered.
On the other hand, a R&W insurance policy provides completely different cover and protects you in the case of a breach.
You want to guarantee innocent misrepresentations don’t damage your deal
Every seller has the best of intentions, and even though you may have full confidence in your company’s track record, it’s impossible to guarantee the integrity of your suppliers, investors, business partners and even employees.
A breach of representation can result in significant financial losses and business sellers can’t rely on a third-party to indemnify them in the case of a buyer claim. A fit-for-purpose R&W policy will help protect your business sale proceeds and provide cover for defense costs arising from the claim of an inaccurate representation.
Access to 24/7 expert advice should the worst happen
In the event of a buyer claim, it can be hard to know exactly what has happened and what to do in order to rectify the situation quickly.
As part of the cover provided under the policy, we have a duty to defend you against claims brought by your buyer. We will instruct leading counsel to defend you against a buyer’s claim giving you the benefit of sophisticated legal advice and representation by top lawyers. Ultimately, we have a joint interest to resolve your buyer’s claim quickly and efficiently.
If you have any questions, or just want to say hello, please contact the transaction liability team at email@example.com.