Reps and Warranties: Protect Your Transaction
With M&A deal volumes surpassing $2.3 trillion and 50-90% of deals failing, reps and warranty insurance through your captive protects your side of the transaction.
The M&A Landscape
US M&A deal volumes demonstrate robust momentum, with transaction values projected to surpass $2.3 trillion. Depending on how "failure" is measured, studies consistently show that between 50% and 90% of mergers and acquisitions fail to deliver on their original financial and strategic goals.
What Are the Potential Risks?
Mergers and acquisitions carry several critical risks that can erode deal value, stall negotiations, or cause the transaction to fail. The most significant threats include hidden financial liabilities, regulatory and antitrust hurdles, cultural clashes, overestimated synergies, and integration failures.
One of the most significant legal risks in M&A transactions is the potential for unresolved liabilities or legal disputes that could affect the acquiring company after the deal is closed. This may include outstanding litigation, regulatory violations, or unresolved contractual obligations of the target company.
In today's market, these transactions are typically with people whom you do not know on the other side of the transaction. Not only do you not know them, but it may also be highly likely they may be from another part of the world, culture and even language.
What Is Reps and Warranty Insurance?
Reps and warranty insurance is a specialty product in mergers and acquisitions that covers losses from breaches of a buyer's or seller's representations in a purchase agreement. Used in 20-25% of U.S. private transactions, it reduces the need for escrow holdbacks and protects against unknown, unintentional breaches.
Key Features
- Protection against unknown risks: Covers breaches of representations (e.g., in customer contracts, intellectual property, or financial statements) unknown at the time of closing.
- Benefits to sellers: Allows sellers to exit a deal with minimal liability and eliminates or reduces the need for a traditional 10% indemnity escrow.
- Benefits to buyers: Offers better coverage, often extending the survival period of reps and warranties, and allows for cleaner, more competitive bids.
There Is a Better Way
Reps & warranty insurance coverage is available in the traditional commercial market. But your transaction may potentially be life changing. Typical transactions today are tens of millions of dollars if not hundreds, if not billion-dollar transactions. Insuring your side of the transaction benefits you. Protection provides peace of mind. Peace of mind comes from insurance. Insurance should come from your insurance company.
When you own your own captive insurance company, reps & warranty coverage can be purchased. If there is a problem with your transaction, you file a claim. Hopefully there is not a problem. In this scenario, your insurance company retains the assets -- your assets.
When you own your own insurance company, your captive insurance company, you can rest assured that you will be the winner.