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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
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
Two Ways TLPE Insurance Might Cover Your Next Deal
Two Ways TLPE Insurance Might Cover Your Next Deal When it comes to acquisitions by PE firms, having Representations and Warranty insurance to cover the deal has become almost S.O.P. – it’s that common. But not every transaction qualifies, such as those under $30M in EV, or deals where the target’s financial records weren’t complete, and the Underwriters declined to cover the deal or at least included many exclusions. There is an alternative to traditional R&W insurance. A specialized new product that can also act as a solid alternative to “tail” policies for Directors & Officers liability coverage, also known
Case Studies: TLPE and Multiple Sellers
In this series on the protection offered by Transaction Liability Private Enterprise (TLPE) insurance to small- and medium-sized business owners who are selling their companies, I’ve written about how it is especially useful in M&A transactions involving tech companies, as well as so-called “indifferent buyers.”
Case Studies: TLPE and Indifferent Buyers
You’re a small to medium-sized business about to be acquired by a much larger Strategic Buyer. You want some measure of protection during the transaction, and you’d prefer not to let a large portion of the sale proceeds sit in escrow for years in case some or all of it could potentially be clawed back if there is breach of a rep in the purchase agreement.
Case Studies: TLPE Insurance and Tech Companies
There is a new R&W product taking the lower middle market M&A world by storm: Transaction Liability Private Enterprise (TLPE). TLPE insurance is designed to fit a blind spot in deals that Buy-Side R&W policies won’t cover, specifically deals ranging from $1M to now $30M in enterprise value. Historically, these deals have been ineligible for traditional (R&W) coverage. Enter TLPE, which was innovated by London-based CFC Underwriting just one year ago, to offer protection for deals that are either too small or too expensive to justify a Buy-Side R&W policy.
Think of Insurance as a War Chest
You know about the drama with Elon Musk and Twitter. Lawsuits are flying back and forth, with both sides alleging breach of contract after Musk declined to buy the social media giant. For super-billionaires like Musk and multi-billion-dollar companies like Twitter, they have the millions needed for such drama. Money is no object. But most of us don’t have that kind of cash. That means when something goes south during a liquidity event, you need to have the proper insurance coverage in place – and proper level. But I propose that you should think about this insurance as more than
The Next Evolution in Representations and Warranty Insurance
An exciting innovation is coming to Representations and Warranty insurance world, and if you’re a Buyer or Seller in the lower middle market, you need to know about it. This new product is especially useful to serial acquirers. In short: insurtech is coming to M&A… sort of.