Do You Need Reps & Warranties Insurance When Selling a Business?

About the Episode

We are joined in this episode by insurance expert TJ Noonan, Managing Director of the M&A Transaction Solutions Practice with Hylant. We talk about what reps & warranties insurance is, the role it plays in a transaction from due diligence through closing, what the seller should know about R&W insurance, how involved an insurance company gets in a transaction, benchmarks in the industry, the future of R&W insurance, and much more. No two transactions are the same, but this discussion will give you insights into some of the common areas around insurance for your business.

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In this Episode

Highlights

• Insurance policies only continue in a stock transaction.
• No two transactions are the same – most insurance policies are very flexible.
• Many private equity firms require reps & warranty insurance (R&W insurance).
• 75% of all PE transactions have R&W insurance.
• 50%-60% of all mid-market M&A transactions have R&W insurance.
• The insurance company often relies on the buyer’s due diligence.
• The standard coverage amount is 10% of the purchase price.
• The seller and buyer usually split the premium.
• The typical minimum transaction size is $30 million, which equals $3 million in coverage, although some insurers will go as low as $10 million.
• 20% of R&W insurance policies see a claim.
• Claims are paid out based on the transaction multiple.
• Claims are paid out to the insurance policy holder, which is almost always the buyer.
• R&W insurance DOES cover fraud.
• Most common claims by the numbers:
  
  • Financial statement accuracy – 20%
  • Tax liabilities (income, payroll, etc.) – 18%
  • Compliance with laws (e.g., minimum wage, etc.) – 15%
  • Material contracts (e.g., all customer contracts are in good standing) – 13%
  • Miscellaneous – IP, litigation, operations, environmental, fundamental, etc. – 34%
• There is no subrogation for R&W insurance, with the exception of fraud.
• R&W insurance costs the seller approximately 2% of the transaction size.
• The buyer and seller’s legal teams are much more comfortable expediting the negotiations of the reps and warranties if R&W insurance is in place.
• Most insurance companies can perform due diligence in seven days.
• There are currently approximately 20 to 25 R&W insurance carriers.
• Not offering R&W insurance should constitute malpractice, according to one national law firm.

Learn More

• Asset vs. Stock Sale
• M&A Reps & Warranties
• Escrow Holdbacks in M&A Transactions
• M&A Due Diligence | Checklist & Overview

Meet Our Guest

T.J. Noonan

Managing Director of the M&A Transaction Solutions Practice with Hylant | Findlay, Ohio

T.J. Noonan is Managing Director of the M&A Transaction Solutions Practice with Hylant. T.J. has several areas of expertise, including account management and M&A experience with a Fortune 50 company, where he served in a variety of roles before joining Hylant. At Hylant, T.J. is part of the M&A and Transaction Solutions (MATS) team focusing on reducing valuation uncertainty and optimizing return on capital during a transaction. The MATS team advises clients by developing customized, value-added solutions to ensure investments are safe while maximizing financial returns.

LinkedIn: https://www.linkedin.com/in/t-j-noonan-80711518