We are seeing an increasing trend of Representations and Warranties insurance being used as a tool to facilitate mergers or acquisitions.
Reps and Warranties insurance protects both buyers and sellers that are involved in these transactions.
Inaccuracies in representations and warranties made by the seller can result in costly liabilities.
This product can significantly reduce the inherent risk of a transaction (for both buyer and seller) and can help overcome barriers in the negotiation process to help close the deal.
Advantages for Buyers:
- Allows the buyer to submit a more attractive offer by lowering the escrow requirement
- Extends the duration of representations and warranties allowing more time to detect and report problems that arise with an acquired business
- Eases the concern about the buyers ability to collect on the sellers indemnification due to sellers poor financial condition
- Allows the buyer to recover damages from an insurance policy rather than a former shareholder who may now be a key part of the ongoing management team.
Advantages for Sellers
- Reduces the risk of contingent liabilities allowing sellers to lock in their return on investment
- Distributes all or most of the proceeds immediately, minimizing the amount needed to be set aside in Escrow
- Protects passive sellers who have not been actively involved in the business and who cannot verify the representations are warranties that are being made
- Expedites a sale and potentially increases the return on investment by eliminating negotiation obstacles such as indemnity requirements
The motivation for this product tends to be more about deal facilitation rather than risk transfer.
Please reach out to us if you would like to discuss how this innovative solution could assist with your M&A negotiations.
Neil Moloney, President
Risk Balance Inc.