When you sell your house, one of the best ways to get noticed by potential buyers is to “stage” the home. This is interior design. Nice furniture and décor. No personal items or family photos. No family photos on the wall. No crazy paint schemes on the wall.
Some sellers even hire professional decorators to arrange their homes in this way.
Similarly, in the M&A world, if you want to use Representations and Warranty (R&W) insurance, you should be prepared to stage your deal to make it more appealing to Underwriters who would be approving and writing your policy.
Doing so will get your deal noticed and your policy priced appropriately.
Why should you have to jump through hoops for a policy you pay for? Wasn’t it just a few years ago that insurers were hawking R&W coverage to anyone who would listen…?
Things have changed.
As I mentioned in my article, “Bandwidth,” the problem is that Underwriters are overwhelmed right now.
R&W coverage has become standard in many circles, including PE firms and Strategic Buyers. It’s more popular than ever as M&A players have come to understand its benefits, that claims are paid properly and on time, and that this specialized insurance can actually smooth negotiation and speed up deal-making.
Combine that with an increase in M&A activity overall and, in particular, a rise in the number of so-called mega deals of $1B+ in transaction value (TV), which get priority from Underwriters…
And the result is that the teams of Underwriters out there (who are also short-staffed as companies can’t hire enough people fast enough to meet demand) simply don’t have the capacity to research and understand all the deals and determine coverage and terms for all the Buyers and Sellers out there who want a policy.
In fact, insurers are actually declining to cover otherwise great risks because their Underwriters lack bandwidth. They’re just stretched too thin. Actually, national insurance brokers are not covering deals under $400M in transaction value in most cases.
Unfortunately, that means to secure R&W coverage for your deals, you have to be prepared to put in some legwork. And while there are some common themes, there is also industry-specific prep you must consider depending on what space your deal is in.
First, the best way to stage your deal is preparing your due diligence. The goal: to make the Underwriters life easier and make less work for them. Ninety percent of R&W policies are buy-side, which means it’s up to the Buyer to do the prep work.
In this case, that means:
1. Having all the proper due diligence done before approaching the Underwriter. Loop in your experts now, including your lawyers and accountants. Identify potential areas of concern…and have answers or solutions ready.
Have that work done upfront so the Underwriter can review quickly, have their most common concerns mollified, and write that policy. And the Buyer should also be prepared to address any new concerns or requests for new documentation that come up.
2. You know the concept of supply and demand. Demand goes up, supply goes down…costs go up. That is what is happening with R&W policies. So, plan for increases in due diligence costs, insurance costs…and higher R&W premiums. Prepare any decision-makers for these increased costs to prevent delays.
Something to note. If you have a deal under $400M TV, forget going to one of those nationwide brokers as they simply don’t have the time for you. You need to look for a boutique broker, somebody regional, somebody experienced. This goes the same for any law or accounting firms you want to work with on the due diligence process. Oh, and be sure to contact these firms ASAP and get on their calendar. They’re busy too.
Also, healthcare, technology, service businesses, restaurant industry, entertainment…every industry has its own little processes you should follow to best stage your deal.
More on that in a future article.
For now, if you’re working on a deal and are worried that R&W coverage might not be available to you, as a boutique broker with long-time experience with this insurance product, I’m happy to chat with you.
You can contact me Patrick Stroth, at pstroth@rubiconins.com.