Selling a business can be an overwhelming process, especially when it comes to concerns about potential costly litigation. Many business owners fear being crushed by larger buyers who might exploit innocent misrepresentations made during the sale. Additionally, leaving a portion of the deal proceeds at the closing table as collateral funding their indemnity obligations can create anxiety. However, there is now a solution that can help alleviate these fears and provide sellers with a clean exit - warranties and indemnity Insurance (W&I Insurance). Each deal is unique, which is why pricing, coverage, and delivery are vital elements of our process. By ensuring that the policy is completely fit for purpose and achieves the optimal level of coverage for each transaction, all parties can gain significant value.
What is Warranties and Indemnity Insurance?
The warranty & indemnity Insurance (W&I) policy protects parties in a merger and acquisition transaction against financial losses arising from breaches of warranties and indemnities provided by the seller to the buyer.
If the seller does not offer an indemnity, the buyer can purchase insurance, or the buyer can purchase insurance that extends the period of time during which he or she can file a claim, or a higher limit than that offered by the seller (if any). SPA obligations may also be replaced by this product, allowing sellers to return the proceeds to investors instead of tying up money in escrow, or retain the trailing risk of warranty claims. The policy has been around for a long time, but has gained popularity in recent years as an alternative to traditional indemnification in M&A transactions.
Understanding Seller's Concerns:
When selling a company that has been built over years or even decades, it is natural for business owners to worry about potential legal complications arising from misrepresented information in the sales agreement. The burden of indemnifying the buyer if they suffer financial damages due to such representations adds further stress. Furthermore, securing this indemnity obligation with part of the deal proceeds means sellers risk losing those funds if any downturn occurs.
Since the insurance market has grown significantly in recent years, W&I is increasingly used in transactions. The buyer is typically the insured party in these transactions. A buyer can claim directly against their W&I policy if a warranty is breached, typically due to a misrepresentation by the seller.
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The Benefits Warranties and Indemnity Insurance Offers:
It addresses these concerns by providing sellers with peace of mind and ensuring they receive their full deal proceeds without unnecessary risks or litigation worries.
1. Elimination of Escrow: It often eliminates the need for escrow because insurance steps in as security interests instead.
2. Defense Against Lawsuits: In case sellers are sued by buyers over misrepresented information, it provides defense coverage while ultimately paying settlements if the buyer succeeds in court after deductible payment.
3. Peace of Mind Security: By obtaining warranties and indemnity Insurance coverage, sellers can walk away from the closing table knowing they have protection against unforeseen liabilities related to warranties or representations made during negotiations.
4. Complete Deal Proceeds: One significant advantage offered by warranties and indemnity insurance is that it enables sellers to receive their full deal proceeds directly into their bank accounts rather than having them tied up as collateral funding for indemnity obligations.
Accessible and Affordable Warranties and Indemnity Insurance:
Historically, it was primarily available for mid-market deals with higher enterprise values. However, now there are options to obtain affordable and accessible warranties and indemnity insurance coverage for smaller business sales valued around $15 million or less.
1. Simplified Process: Unlike mid-market deals that often involve underwriting fees and calls, obtaining this coverage through the available program is straightforward. The process typically involves answering fewer than 10 questions before receiving a non-binding premium indication.
2. Quick Pricing: With only two days required to price out the insurance policy, sellers can efficiently assess whether W&I insurance is a viable option without wasting valuable time.
3. Competitive Pricing: Despite being more readily accessible, pricing remains competitive as insurers recognize the importance of offering affordable solutions for small businesses looking to secure their exit strategies.
Conclusion:
W&I Insurance presents an attractive solution for business owners who are concerned about potential costly litigation during the sale of their companies. By eliminating escrow requirements, providing defense against lawsuits, ensuring peace of mind security, and enabling complete deal proceeds in sellers' bank accounts, it offers a clean exit strategy while mitigating risks associated with misrepresented information in sales agreements.
If you're considering selling your business or advising someone on their exit strategy, concerns regarding costly litigation arise from misrepresentations made during negotiations? Look no further than W&I Insurance as it can provide both financial protection and peace of mind throughout the transaction process. Speak to our representatives for best assistance. We can arrange cover that meets both parties' needs.
