Every merger and acquisition presents the risk of breached reps and warranties. To facilitate a successful corporate transaction, Rep and Warranty Insurance can help you offset liabilities and reduce hefty unanticipated losses.
What Are Reps & Warranties?
Anytime a company is sold or consolidated, an extensive set of written statements, known as Reps and Warranties, are exchanged between the seller and buyer as part of their Purchase and Sale Agreement. Ultimately, this is the process of each party documenting their understanding about the state of the business.
Typically, the seller has the most to prove, and they will do this through Representations. These are assertions of fact that disclose information about the company’s value, history, disputes, or potential complications. However, the seller may not be the only one submitting representations. The buyer or acquiring company may need to prove their legal ability to compensate in various forms (i.e. company stock).
Once the transaction is complete, if a representation is breached, found to be false, or missed altogether, warranties, or indemnification clauses, can be enforced.
What is Indemnity?
At its core, indemnity is contractual compensation in case one party causes another party to suffer loss. Every Purchase and Sale Agreement will include indemnification clauses in case financial loss or liability stems from an inaccurate representation. Most indemnification claims involve the seller. Even with the best intentions, liabilities may not be discovered until after a company has been sold. If it’s enough of a burden on the buyer, they may seek to bring an action against the seller to indemnify them (make them whole) for the misstatement or missed statement. This is where Rep and Warranty Insurance can make a difference by millions of dollars.
What is R&W Insurance & Why is it Useful in Corporate Transactions?
Rep and Warranty Insurance steps in on behalf of the seller, takes ownership of certain liabilities, and can help pay for covered rep and warranty breaches. This policy ultimately benefits everyone involved:
Buyers: Sets you apart in a competitive deal by making a 98-100% cash-at-close offer without sacrificing an indemnification pool. Not to mention, this can reduce costly litigations if you need to enforce an indemnification clause. It can be particularly useful if the seller will remain an important part of the company, as it can take some of the emotion out of taking action.
Sellers: Reduces the chances and potential impact of an indemnification action while receiving more cash at closing.
What are your next steps?
Rep & Warranty Insurance becomes effective at closing . However, it is beneficial to connect with an insurance advisor in the early stages of your deal.
If you are a seller, connect with an expert before going to market. We can provide quotes for use in your data room to establish that you expect a policy to be purchased. Addressing this up front can take one potential sticking point out of the LOI negotiations.
If you are a buyer, connect with an expert pre-Letter of Intent (LOI). We can provide quotes up front so you know before submitting an offer what the cost of the policy will be.
PRO TIP: Before acquiring another business, be sure their accounts receivable are collectible. If certain receivables aren’t insurable, this is a good reason to negotiate a lower price for those assets. Learn how Trade-Credit Insurance can help you do this.
Ultimately, corporate transactions are complex, and you need insurance experts capable of supporting you beyond the policy.
What do underwriters need to provide a quote? Find out here.