Notable M&A Trends to Watch Out for in 2023
When the world’s largest transactional insurance broker talks… you listen. I’m talking about Marsh McLennan, a Fortune 500 firm with a global reach that wrote more than 1,000 Representation and Warranty (R&W) insurance policies in 2022. Their Transactional Risk Insurance 2022: Year in Review report is an excellent resource for anyone involved in M&A, as well as the specialized insurance products like R&W that have become essential to deal-making. It’s a report worth taking a close look at…because in addition to reporting on trends from the past year… they are also looking ahead and forecasting what they believe will happen in 2023. Not to mention, with their far-ranging reach and involvement in so many transactions, this report is based on a large and reliable sample size of deals and the insurance policies that covered them. The Most Important Lessons from the Marsh Report First off, we have good news – for deal-makers at least. In 2022, we saw significant price drops for premiums for R&W insurance policies. This is largely the result of diminished supply in the fourth quarter of 2021. That drove rates up to just shy of $60,000 per $1M in coverage in the face of ongoing demand for this product in a banner year for M&A. However, by 2022, we saw two things that brought the price for R&W coverage down: Insurance companies increased their capacity by hiring more underwriters to handle the demand, which increased the supply of insurance. As supply increased, we saw the price of coverage trend down in 2022 to where it had been in the past: which was between $33,000 to $36,000 per $1M in coverage. That’s a drop of more than $20,000, which is huge. I don’t expect that prices will see a drop at that level again, of course. However,
The Biggest Danger to M&A Sellers – and How to Avoid it
I got a call earlier today… one that I wasn’t exactly happy to receive. But I feel like I should share the situation that I learned about because it showcases the importance of transactional liability insurance to cover M&A transactions. Here’s the situation… The caller had sold their industrial supply company in the Midwest for just about $3.5M. But, as the deal neared close, additional inventory, not initially part of the deal, was discovered. Buyer and Seller agreed that this inventory was worth $150,000. And the Buyer suggested that they would pay the Seller in installments of $10,000 over 15
Why – and When – M&A Buyers Should Secure Sell-Side Transactional Liability Insurance
Let me say this loud and clear right now: Every Buyer of a sub-$30M EV target should insist on a sell-side Representations and Warranty (R&W) insurance policy from their counterparty. This might sound strange. And I know that you’ve probably encountered many Buyers who are reluctant or resistant to the idea of even considering a sell-side insurance policy. After all, the Buyer is not insured under this coverage. The name on the policy is the Seller’s. A sell-side policy is only triggered when the named insured (the Seller) receives a demand from the Buyer saying there has been a breach
A Close Look at Deal Drivers for 2023
When looking ahead at 2023, it’s clear there are economic headwinds out there impacting deal-making, including inflation and the threat of recession. Big tech companies are entering a period of austerity, with giants like Google and Microsoft laying off tens of thousands of employees recently. They over-hired during the pandemic, and they are now having layoffs. But I’d make the case that lower middle market M&A, especially with regards to tech, media, and telecommunications firms and business services companies, will see no slowdown in deals… In fact, there could very well be an increase in transactions in the coming year.
Breaking Down Your Transactional Liability Insurance Options: No Insurance, Traditional Buy-Side, and New Sell-Side
When looking at options to cover a M&A transaction in the past, we’ve always said that you could either use traditional Representations and Warranty (R&W) insurance or… nothing. Nothing would often be the case for deal sizes under $20M, where R&W coverage simply does not extend these days except in very special cases. Now, we have a compelling third option, an innovative Sell-Side policy, for the smaller acquisitions out there. It’s called Transaction Liability Private Enterprise (TLPE). It was created just a couple of years ago by London-based CFC Underwriting but is now gaining ground in a serious way as
TLPE Case Study: Buyer Uses TLPE to Win Auction on Desirable $13M Tech Company
For many years, it was standard practice for Sellers in M&A deals with leverage to insist that Buyers forgo escrows as part of the terms of their deal and instead use Representations and Warranty (R&W) insurance. However, there is a catch … This process works only if the target’s pricing is above the Buy-Side R&W guidelines, which is $20M in most cases. And even then most insurers are reluctant to cover more than 30% of the purchase price.
Step by Step Process for Applying, Quoting, Underwriting and Ultimate Placement of a Rep & Warranty Policy
Step 1: There’s no insurance application. If needed, Rubicon will sign any NDA required by either party. We then required the following documents:
Rep and Warranty Insurance Is a “Mature” Product
In the world of M&A, Representations and Warranty (R&W) coverage has become a go-to transaction insurance product. Many PE firms, for example, have made it an almost standard part of any deal that is able to be covered. Simply put, R&W is a mature insurance product and despite its growth in popularity, it has not fallen off in terms of quality.
The Lowdown on “Naked Tail” D&O Insurance
In insurance parlance, if you insure a particular exposure, you’re covered. If not, you’re bare. If you’re looking for a policy that covers something that’s never been covered before, you’re… naked. That’s the situation many privately held, small and middle market companies find themselves in when they seek to sell their business. The Buyer asks them to secure Directors and Officers Liability insurance (D&O), specifically a “tail” policy to make sure there’s a source of insurance coverage in case the Seller is held liable for any wrongful acts against an employee or others – things like human resources issues or