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Must-Have Insurance for the Lower Middle Market – and When It Should Join the Deal Conversation
Transaction Liability Private Enterprise (TLPE) has opened the door for thousands of lower middle market (LMM) deals priced from $1M to $30M to access the same risk transfer tool that 95%+ PE-driven M&A transactions currently enjoy, and at a fraction of the cost. Just as Buy-Side Representations and Warranty (R&W) took a few years to gain traction, we’re seeing momentum picking up in this developing market. One recent case study shows just how effective this coverage is. It involves the sale of a small Mexican restaurant chain to a regional restaurant group. But soon after the deal closed, the Buyer discovered that the Seller had neglected to mention several liabilities, including undisclosed equipment leases and labor law violations. Together, this resulted in close to a half-million dollars in damages. With TLPE coverage in place, the insurer paid those damages, as well as legal defense costs. Talk about a clean exit for the Seller. And the Buyer was happy to be compensated without having to go after the Seller. The benefits of TLPE are becoming clearer every day to savvy Buyers and Sellers. The question I’m now getting is not whether TLPE is worth doing, but rather when is the best time to incorporate TLPE into our deal? After dozens of TLPE transactions, our experience shows the ideal time for introducing the concept of insurance is during the drafting of the Letter of Intent (LOI). The LOI sets the framework for the transaction where potentially contentious subjects such as indemnification are first raised, which can immediately be offset by the introduction of insurance which will transfer the indemnity risk away from the Seller and over to an insurance company. While one can secure TLPE insurance even after a purchase agreement is signed (subject to a signed and dated No Known Claims
The Secondaries Market Solution
“Everything changes and nothing stands still.” – Heraclitus, Greek philosopher With few exceptions investment funds were not meant to last forever. Investors seek to cash out, while new investors want to join in. The challenge comes during the transition of the old investors leaving and the new ones entering: The original investors want one thing: their money (along with its accumulated growth) free and clear. New investors want to move forward without legacy risk. Between these interests lies the General Partner (GP) or sponsor, who has a foot on both sides of the fence. The biggest concern for new investors
The Advantages of Buyer Protect Insurance
Transaction Liability Private Enterprise (TLPE) insurance, a relatively new transactional liability insurance product, has taken off in a big way with savvy Buyers in the lower middle market. It’s no wonder. TLPE fills a gap for deals that traditional Representations & Warranty (R&W) insurance won’t cover. TLPE policies are designed to cover transactions from $1M to $30M to the full purchase price – for a maximum of $20M. TLPE coverage is easy to get, with minimal underwriting. The cost is a fraction of traditional R&W policies. On top of that, insurers pay promptly if the Buyer brings a legitimate claim
R&W Claims Trends and the Potential Impact on Premiums
Insurance giant AIG is concerned. Although the rate of claims from Representations and Warranty (R&W) insurance, which covers M&A transactions, has been steady since 2012 across the board, for deals of all sizes… they have noted a rising trend with how much they are paying out for smaller claims. In a nutshell, they are paying more on smaller claims than before. This is for policies for smaller deals where the premium was a relatively small amount. In other words, the area where premiums are down, claim payments are up. I consider this a signal from AIG. They’re saying this trend
M&A Mastery in Architecture and Engineering Unveiled
Discover the art of strategic mergers in architecture and engineering with M&A expert David Kimbrell. In this episode of M&A Masters, join me as we engage with David Kimbrell, a seasoned M&A authority in the architectural and engineering sector. With over four decades of unmatched expertise, David has masterminded the art of buying, selling, and advising firms in this specialized niche, revolutionizing the concept of strategic mergers and acquisitions. Delve into the intricate world of M&A for architectural and engineering firms. Explore David Kimbrell’s unique journey from environmental health to M&A mastery. Learn how interest rates and market dynamics influence
What’s in Store for M&A in 2024
It’s been an interesting last few years in the M&A world, to say the least. First, deal-making fell off the cliff during the pandemic. But, in 2021, after we emerged from lockdown, we had a record-breaking year for M&A activity due to pent-up demand and a tremendous amount of dry powder in the hands of eager PE firms and Strategic Buyers. According to Prequin Alternatives report from that time, PE firms alone had $1.32T on hand as of September 2021. Things slowed slightly towards the end of 2021 and there was a distinct – but inevitable – drop in deals
TLPE Insurance Alone Wasn’t Enough to Save This Deal
An M&A deal just closed recently, and because of the unique insurance product I secured for the deal and the modifications necessary to make that fit the transaction, I think it’s worth a closer look. It involves the acquisition of a Florida-based earth moving company that specializes in delivering dirt and preparing sites for construction. It’s not a huge business. The deal was for $2.8M. But they are like a lot of companies. Family run by the founders. They’ve been around for 40 years, doing well but operating pretty much the same for their entire history. Then a small private
The Role of an Independent Sponsor
In this episode, we’re taking a look at a unique independent sponsor’s M&A strategies. My guest Bakari Akil is the founder of Graves Hall Capital, which seeks to buy and run businesses where owners and founders are seeking an exit. Bakari will share his M&A journey and advice for enticing a seller to do business with you. He’ll also cover: Why he believes buying companies is the best wealth building strategy What types of companies he’s looking for The role of reps & warranties insurance And more Mentioned in this episode: http://graveshallcap.com https://linkedin.com/in/bakariakil Transcript Patrick Stroth: Hello there. I’m Patrick
How to Take Full Advantage of the Surge in Lower Middle Market Deal-Making
Overall, there has been a slowdown in M&A activity in the past couple of years, post-pandemic. After an all-time high of 42,436 transactions in 2021, valued at more than $5.6T… deal-making tumbled to 41,808 transactions valued at $4.5T in 2022. And so far, with Q2 numbers just in, it looks like 2023 is following this “downward” trajectory. This is to be expected as the market “rebalances” after the record-setting deal-making frenzy we had in 2021, which was not sustainable because the result of very special circumstances with the global shutdown in 2020… and the rush to make acquisitions when the