Reps & Warranties Insurance: Getting an Edge in the Sale of Your Business
You’re just about ready to burn it all down. As you jump on your fiftieth conference call to discuss the details of the sale of your company, you’ve had it. You signed the Letter of Intent to sell your business weeks ago and ever since you’ve been brutalized with question after question after question. Every call is full of technobabble, finance speak, and “legalese”.
You’re approaching the scheduled closing date and the past few calls have all revolved around representations and warranties. You feel like you’re being accused of a crime based upon the requests from the buyer’s attorneys. And they’re requesting that a significant amount of the purchase price be held in escrow to cover any claims they might ultimately make against you. To be honest, you’ve had the following recurring thought: “These people don’t deserve my company. I’ll just cut my losses now and forget about selling.” As you dial in for yet another conference call, you wonder if there is a way to make this process less painful.
While there was no avoiding these discussions previously, in recent years insurance companies have increasingly offered a product known as Representations & Warranties (R&W) Insurance. This policy takes on the risk of a claim against the seller and eliminates the need to escrow a portion of the purchase price.
Why Would this Interest You as the Seller?
Given that you, as the seller, plan to no longer own the business, you would probably like to leave as little money behind as possible. In a typical transaction, it is not uncommon to see 10% or more of the purchase price held back in escrow or contingent payments for a year or even longer. This is an uncomfortable situation, especially when selling your business to a deep-pocketed financial investor with access to the best legal counsel.
On the other hand, if a seller offers a Reps & Warranties policy as part of the package to a buyer the premium needs to be paid, but the escrow goes away. This makes for a much cleaner transaction.
Why Would this Interest A Buyer of Your Business?
From the buyer’s perspective, a Reps & Warranties policy can streamline negotiations. Why? Now it is not the seller, but the insurer that is on the hook for any post-closing claims. What this means is that the buyer will be negotiating many of the esoteric and complex terms in the purchase agreement with an insurance company that specializes in this area, rather than you.
This reduces the closing risk for the buyer, something of great value. Keep in mind that most buyer transaction expenses are not contingent on success, so their advisers need to be paid regardless of whether or not the transaction closes. In other words, a failed transaction can be pricey for a buyer.
Like all insurance products, Reps & Warranties Insurance does have its limits. For example, it doesn’t always work for smaller transactions or certain industries that are seen as too risky. However, it is an option worth exploring if you want to help your exit go as smoothly as possible.
Recommended Read: Preparing Your Business For Exit is Just Good Business Strategy
Are you thinking about selling? Would you like to know more tips and tricks to make your selling process a success? Consider reaching out to Doescher Group to learn more.
