In this series on the protection offered by Transaction Liability Private Enterprise (TLPE) insurance to small- and medium-sized business owners who are selling their companies, I’ve written about how it is especially useful in M&A transactions involving tech companies, as well as so-called “indifferent buyers.”
Now, I’d like to highlight how TLPE coverage, which is designed to fit a gap in deals that Representations & Warranty insurance won’t cover and protect SME Sellers, can be indispensable when the sale involves multiple sellers.
First, a quick refresher…
- TLPE insurance is intended for deals that are $ 30M EV or below, although there can be exceptions.
- This is a Sell-Side policy where the Seller, rather than the Buyer, is the policyholder.
- TLPE coverage is easy to get, with a modest amount of underwriting necessary.
- With TLPE, the Seller is able to reduce their holdback. Retention with TLPE in place is only .5% of enterprise value or $10,000 whichever is higher. This helps the Seller keep most of the sale proceeds right after closing.
- TLPE policies are triggered when a Buyer brings a written demand for damages against the Seller.
Now, back to how TLPE insurance specifically addresses the issue of multiple Sellers.
This could really apply to any company that has partners or co-founders or co-owners. These situations can get tricky and TLPE can help bring in peace of mind for all involved.
In one recent case Rubicon was involved in, a funeral home was set to be acquired by a PE firm. The two partners wanted to go their separate ways after the sale, with 50% of the proceeds each. But there was a concern… What would happen if there was a breach of the reps in the sale contract? Technically, each partner would be compelled to pay 50% of the damages. But what if one of the partners didn’t have the money? Would the other partner be on the hook for the whole thing?
This becomes the perfect scenario for TLPE coverage because when it is part of the deal, the Buyer simply notifies the Sellers of the breach, and they report it to their insurer. And those claims get immediate response from the Insurer.
It was actually the Buyer who approached us because the Sellers were reluctant to move forward. As a PE firm they were very familiar with R&W coverage, but that would not be a fit for this transaction. They were looking for alternatives and discovered TLPE would be the perfect fit.
And once they realized that TLPE would give them the protection they wanted, the Sellers were all about it too.
In the end, we were able to get pricing to the parties within a day. And we insured the deal up to the purchase price. The Sellers walked away happy to not have to look over their shoulder as they moved onto new opportunities.
Please note that because TLPE policies are sell-side, all the Buyer had to do was make the introduction. We then worked exclusively with the Sellers, with no information needed from the Buyer. And no information is shared with the Buyer either by us as the broker or the underwriters.
A Clean Exit After the Founder Dies
In other case, the founder of a HVAC and plumbing company, valued under $10M, passed away. His estate wanted to exit out of the business as quickly and cleanly as possible.
A PE firm specializing in the industry was interested in the acquisition. But the estate was seeking to steer clear from indemnity exposure…while the PE firm was adamant that they could not accommodate that request.
Thankfully, the Seller’s representative heard about TLPE insurance and approached us. With this coverage, the PE firm was named as the Loss Payee on the policy. That means in the event of a claim, the Insurer will pay the Buyer directly, not the estate. So, the Buyer would not have to pursue the estate for any settlement payment.
In this case, the Buyer felt satisfied with the protection offered and moved forward with the acquisition. And the Seller had their clean exit.
Post-Divorce Protection
In one recent situation, TLPE was key in helping co-owners go their separate ways after their business’s sale.
A married couple were co-founders of a successful manufacturing company. But they were separated and planning to divorce. One spouse wanted to stay with the company post-acquisition, and the other wanted no part of it. The challenge was how to split this asset and protect both parties from risk and indemnity exposure.
With the TLPE policy we were able to insure the deal for the full deal amount, $10M.
Where to Go From Here
It should be clear at this point that TLPE coverage is a very useful tool for small business Sellers in M&A transactions. Not only does it provide protection, reduce risk, and let the Seller take home more of the sale proceeds, it is also easy to qualify for and inexpensive.
And although this is a sell-side policy, Buyers are very welcome to make the proper introductions to a broker to get the ball rolling.
If you have any questions or would like to explore the protection TLPE coverage could offer you or your clients, please contact me, Patrick Stroth, at pstroth@rubiconins.com.
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Case Studies: TLPE and Multiple Sellers