Representation & Warranties Insurance
Looking for creative ways to negotiate a cleaner, more attractive purchase or exit from your business? The mergers and acquisitions market may be more competitive than ever, with more private capital available to chase deals. However, errors or inaccuracies on the part of the seller or buyer can be very costly, leaving both sides at risk.
Protect the deal with representation and warranty insurance
Representation & Warranty Insurance (R&W) provides protection for everyone, which can help both parties feel more confident when agreeing to a deal. This kind of coverage can shield both buyers and sellers from a variety of unknowns, including:
- Indemnity obligations
- Tax exposure
- Unknown litigation
- Breach to the sales and purchase agreement
- Financial loss post close
- Financial statement unknowns
What is representation and warranty insurance?
R&W is used to shift certain transaction-related risks from buyers or sellers to a third-party insurer. In general, R&W can protect both buyers and sellers against losses suffered from breaches of the representations and warranties contained in a purchase and sale agreement. Often, R&W can replace or supplement the indemnity contained in such agreements.
Protection for buyers
During a negotiation, buyers typically want to protect their investment as much as possible by doing their due diligence, seeking broader representations and warranties, requesting more comprehensive indemnities, and requiring larger escrows and holdbacks.
- Enhances protection for breaches of representations and warranties, secures the indemnification provided by sellers.
- Defends the buyer if sued by a third party for loss resulting from seller’s breach.
- Eases the ability to collect on the sellers' indemnification.
- Reduces hold back by allowing a lower than customary indemnification.
- Extends the duration of representations and warranties, buyers gain additional time to detect and report problems.
- Protects relationships with the sellers or executives who may be staying on.
Protection for sellers
Sellers will often look to make as clean of a break as possible, seeking to reduce their transaction indemnity profile risks. As such, sellers tend to want fewer and narrower representations and warranties (with shorter survival periods). In addition, sellers typically request limited indemnities and smaller (or no) escrows and holdbacks.
- Expedites a sale and potentially increases the purchase price.
- Reduces escrow, reducing risk and pressure on cash-flow.
- Faster distribution of sale proceeds.
- Reduces the risk of contingent liabilities arising from future R&W claims.
- Protects passive sellers who have not controlled or been actively involved in the management of the target business.
Experience is key
Reliance Insurance has a great deal of experience with Representation & Warranty insurance, both as a support for private equity firms and strategic buyers in North America and Europe, but also educating legal and accounting firms on the subject. Call us to learn more about how Representation & Warranty insurance product can help your offer stand out, and close the deal.