For many, an IPO is the most exciting event in the life of a business. But I liken it to a team’s top pick in the NFL draft because the IPO itself is just the beginning. There are a lot of expectations for the player (or company) … and it could end up being a bust.
But in M&A, Sellers are done, they’re exiting. To me, that makes these deals life-changing, even generational events. And who wouldn’t want to be a contributor to that process?
If I do my job, I make this life-changing event faster, cheaper, simpler and happier for all sides. If that doesn’t get you fired up, I don’t know what can!
Since I started doing this in 2014, my tool of choice to do just that has been Representations and Warranty (R&W) insurance.
This specialized product removes the need for an indemnification clause in the Purchase and Sale Agreement and for money to be held back in escrow. It ensures that if there are any breaches, the Buyer can file a claim easily and be made whole in a timely manner.
In short, this type of coverage transfers all the risk to a third party – the insurer. And, as you’ll see in a moment, this is just a small sampling of its many benefits.
The first time I was introduced to R&W insurance was with a deal with a long-time owner and founder ready to sell his business for $50M. His goal was to take the money and “ride off into the sunset” to build settlements in Israel. The culmination of a lifelong dream.
He almost didn’t get there.
Because the Buyer was worried there might be a breach two or three years after closing and they would have a hard time tracking down this Seller out of the country, they were asking for half the purchase price to be held in escrow.
I realized we could change the Seller’s life by facilitating the deal the right way. In this case, R&W coverage would allow him to avoid this huge escrow requirement that would see him stuck waiting for the other half of his money for years.
We arranged for a $20M policy with a $1M deductible. So instead of $25M in escrow, the Seller was given the opportunity to exit the country with $49M out of $50M. What I call a clean exit!
Since that day, it’s been my mission to provide this coverage for as many deals as possible.
Why Now Is the Best Time for R&W Coverage
The use of R&W insurance is more widespread than ever, with PE Firms especially embracing this coverage. There are many reasons why there’s never been a better time to sign up with your next deal.
- Sub-$20M deals are eligible
If you’ve heard of R&W insurance, you may have thought it was only for larger deals. But in recent years it has become available for deals under $20M in transaction value. It’s wide open to the lower middle market.
- Case closed
The debate as to whether or not R&W is good for M&A has been settled. R&W is recognized as a must-have for most deals, and regularly described as a “no-brainer,” especially by those who have used it at least once.
- More competition is good for everyone
As an insurance tool, R&W has proved to be credible, reliable, and now sustainable, attracting new insurance companies each year. This increase in competition brings the same by-products all consumers enjoy in any industry: improved products and services at lower costs.
- Price is a non-factor
Even before competition drove down R&W premiums, the financial and non-financial benefits afforded to both sides of a deal far outweighed the cost. I argue R&W is essentially “free” to the policyholder.
- Abundance of opportunity
Considering the 1,000’s of PE Firms, Family Offices, Strategic Acquirers, Search Funds and now, hundreds of SPACs, most of which complete multiple transactions annually, there are plenty of deals and money out there for everyone.
- Accelerates the deal process
More diligence needs to be done if R&W is part of a deal to make sure nothing gets excluded. But overall, this coverage smooths out negotiations and takes out many contentious elements. When R&W insurance is in place, there’s no need to debate every point of a Purchase and Sale Agreement. If there’s a breach, it’s covered. Deals with this coverage in place are 5X more likely to close.
- More money at closing
Because there is no need for a significant amount of the purchase price to be held in escrow, the Seller takes more money home at closing, whether it’s for retirement, a new venture, or anything else.
- Claims get paid
If you think R&W coverage is like other insurance products, where Insurers are reluctant to pay claims and eager to find loopholes, think again. Insurers do pay claims quickly and without hassle.
Lower costs, quicker closings, less money held in escrow… for these reasons and many more, there is no debate. R&W insurance has never been stronger and more available.
That said, there are hundreds of brokers out there offering this product. But instead of going to the big houses where you’ll just be a number and your deal is not a priority, or your local insurance rep who doesn’t specialize in M&A, you should work with a broker who is “geeked out” about the benefits of Representations and Warranty insurance and really believes in this product.
I’m one such broker.
If you’re interested in making Representations and Warranty insurance part of your next deal, contact me, Patrick Stroth, at firstname.lastname@example.org.