Article August 4, 2021

4 things you didn't know about M&A insurance

When discussing M&A insurance, it’s important to understand some of the risks that SME sellers face as a result of their deal and the potential advantages M&A insurance can provide.

To help spark these conversations, we’ve put together a selection of questions you can ask, along with key talking points for each.

  1. Did you know that your buyer can make a claim against you after you have exited your business?

    When selling your business, buyers usually demand that you provide representations and warranties.

    Representations and warranties are legally binding assurances which you will be financially responsible for if they are incorrect and the buyer suffers financial loss.

    In fact, the buyer can make a claim against you up to 6 years after you’ve sold your business.

  2. Did you know you can protect your business sale proceeds?

    When in business, issues crop up on a daily basis which would be dealt with in the ordinary course.

    However, once you’ve exited, a seemingly minor issue can sometimes amount to a much larger claim.

    Generally, a business is valued on a multiple of EBITDA (essentially a specific measure of profits), meaning that claims can quickly multiply if the issue harms the profitability of the business.

  3. Did you know that M&A insurance can help you avoid the need for an escrow?

    An escrow is a pot of money held by a third party which is funded by the seller. An escrow is there to ensure that the seller can reimburse the buyer for any loss they suffer as a result of a breach of a representation or warranty.

    With M&A insurance in place, the buyer can have peace of mind that claims will be paid. This means that you may be able to negotiate to reduce, or even eliminate, your escrow obligations and unlock your hard-earned sales proceeds immediately following the deal closing.

  4. Did you know that M&A insurance makes your business a more attractive proposition?

    Having M&A insurance in place gives a buyer comfort that, if any issues were to arise, there is insurance in place which can stand behind any claims. This can make your business a more attractive proposition, giving you greater negotiating power and facilitating the deal to get done.

    A buyer will often want the person with the most expertise to remain in the business – that person is often you. This can be a difficult position if their only route to indemnification is to bring a claim against you, one of their most prized assets.

    M&A insurance can help get around this delicate issue. The buyer can be rest assured that indemnification is available if issues do arise, and the seller has the comfort of knowing that claims under the agreement can be covered by the policy.