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

3:30 What types of insurance are relevant to M&A transactions?
4:35 Can you insure against tax-related risks?
5:50 Why can’t a buyer rely on the seller’s existing insurance policies?
7:00 Does the seller need to continue the policies after the closing?
8:00 Change of control clauses
9:10 Does insurance cover successor liability-related risks?
11:50 How efficient is the market for pricing M&A-related risks?
13:10 Overview of reps & warranties insurance
16:40 To what extent does the insurance company need to perform due diligence?
18:10 How does the insurance company become involved in deciding the basket (minimum or deductible), cap (maximum), knowledge qualifiers, and other terms in the purchase agreement?
21:55 Who pays the premium?
23:30 Does the cost increase on a pro-rata basis for smaller transactions?
26:00 How long are most R&W policies?
28:00 What are the most common claims?
35:20 How does the definition of knowledge affect coverage?
40:00 What should the seller know about R&W insurance?
42:45 How do you quantify the amount of the claim?
44:40 How involved is the insurance company in performing due diligence and negotiating the purchase agreement?
47:10 Are carriers industry specific?
49:00 What other types of M&A insurance do insurance companies offer?
54:30 What is a risk profile assessment?
57:45 Insurance benchmarks by industry
1:04:00 The future of R&W insurance

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

Meet Our Guest

T.J. Noonan

T.J. Noonan

Managing Director of the M&A Transaction Solutions Practice with Hylant

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.

Location Location: Findlay, Ohio
Website Website: www.hylant.com

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