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.
Enter Transaction Liability Private Enterprise (TLPE) insurance. This relatively new innovative insurance product, created by London-based CFC Underwriting, is designed to fit a gap in deals that R&W insurance won’t cover. Specifically, this is a Sell-Side policy where the Seller, rather than the Buyer, is the policyholder.
TLPE policies are designed to cover transactions from $1M to $30M to the full purchase price – for a maximum of $20M – at a cost that is a fraction of Buy-Side policies.
A huge benefit is that TLPE coverage is a breeze to get, with virtually no underwriting necessary. Plus, when the Buyer brings a claim for damages, the insurer pays those claims with no fuss.
With all these advantages, it’s no surprise that savvy Buyers are beginning to use TLPE to win auctions. That was the situation in a recent deal.
A highly sought-after tech company was fielding offers ranging from $10M to $13M from a host of potential Buyers. (Note: TLPE has been emerging as a go-to insurance product in the tech space especially.)
As part of the terms, the tech company’s representative required bidders to include R&W, for which the target would agree to pay half the cost. They did not want any indemnification risk. And being so attractive, the Seller was able to make this demand this requirement comfortably.
Some competing Buyers could not find a R&W Insurer willing to cover a sub-$20M deal. Those Insurers that were willing to move forward, usually because of a pre-existing relationship between the insurance company and Buyer, still delivered pricing over $200,000 (the Seller’s share would be $100,000) for a $3M limit policy. Not good.
The prospective Buyer, a PE firm, who won the auction and acquired the tech company was one that knew about TLPE insurance and Rubicon Insurance’s experience in this somewhat unknown niche insurance product.
As a result, the Buyer secured terms for a $10M limit TLPE policy for just under $100,000 in total cost (which meant the Seller paid under $50,000 for their share) for more than triple the coverage they would have received with traditional R&W insurance.
Where We Go From Here
This is just another in a growing list of cases where Sell-Side TLPE beats Buy-Side traditional R&W insurance.
Buy-Side coverage had the unquestioned number one source for protection for Buyers and Sellers involved in M&A transactions for years… until now.
I will not go as far as to claim the era of Buy-Side R&W is done. But certainly, its Golden Age has passed as the price and value advantage of Sell-Side TLPE coverage becomes more well-known.
One last thing… another big advantage to TLPE insurance is that Buyers can bridge the coverage gap between the Sell-Side and Buy-Side policy by getting an extra complimentary policy, called a Non-Disclosure Policy. This insures the Buyer against Seller fraud.
So, I put this out there to PE firms going after these “smaller” targets where traditional R&W will either be unavailable or too expensive for not enough coverage:
Take a look at TLPE insurance to help you secure these very desirable yet small acquisitions. At Rubicon M&A Insurance Services, we have experience in this niche insurance and standing by to answer your questions.
Please contact me, Patrick Stroth, at firstname.lastname@example.org