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 equity firm comes in with an offer to acquire them, and since they’re looking for an exit at the right price, they’re ready to talk.
But then they have “the conversation” about Representations and Warranties and the Indemnity Cap. The Cap, says the PE firm, must be at the full purchase price. .
For the owners that’s a no-go. It derailed the deal.
It’s not that they have anything to hide or that they’re trying to pull one over on the PE firm. As they put it, they simply don’t have very sophisticated accounting systems. There could be some sort of financial issue lurking in their records that was never noticed. They don’t think there are any problems… but they’re not sure.
That’s when the PE firm called Rubicon to inquire about Transaction Liability Private Enterprise (TLPE) insurance.
TLPE coverage is designed to fit a gap in smaller deals that traditional R&W insurance won’t cover. Also unique is that this is a Sell-Side policy. That makes the Seller, rather than the Buyer (which is the case with R&W insurance), the policyholder.
TLPE policies are designed for the lower middle market, covering transactions priced from $1M to $30M. TLPE has the capacity to insure deals up to $20M, making full purchase price policies available for most transactions.
A huge benefit is that TLPE coverage is a breeze to get, with simple application process that can be completed in a day. Cost is a big plus; there’s no underwriting fee required ($40K+ savings) and the $15K to $20K per $1M Limit premium rates are a fraction of traditional R&W policies.
And… if the Buyer brings a claim for damages, the insurer will pay the claims promptly, consistent with Buy-side R&W policies.
The PE firm had heard about this good news and felt TLPE coverage would be a good fit to protect themselves in this deal, in the face of Sellers unwilling to meet their proposed terms for a deal with the Indemnity Cap set at the purchase price.
But the Buyer was still concerned about fraud. Unlike Buy-side R&W, Seller Fraud is excluded in TLPE policies. The Buyer didn’t suspect any problems, but the Seller’s resistance to his terms was a red flag.
But there is a workaround.
It’s an add on at a cost of $5,000 per million called Buyer Protection, which can be combined with TLPE coverage. Buyer Protection is a new enhancement to the TLPE policy to cover this gap between Sell-side and Buy-side R&W programs.
While Buyers are protected from Seller breaches of reps and warranties contained in the Purchase and Sale Agreement under TLPE, they are also covered in the event Sellers reps are knowingly incomplete or misleading.
So far, we’re all good on the Buyer’s side. But what about the Seller?
In this case the Sellers have run a successful business. They have a 40-year+ track record. They’re good at what they do. There’s a reason they have been targeted for acquisition.
But, as they admitted, they’re not tremendously sophisticated in terms of accounting. And they’re not savvy about the M&A world either. This is likely the only deal they’ll be involved in.
As a result, all this deal-making activity is new to them, including the idea of transactional liability insurance. As long-time business owners they knew all about business insurance and had had good – and bad – experiences with claims in the past. But insurance to cover a deal was new territory.
As a broker, I’m the fiduciary of the policyholder, which in the case of TLPE insurance is the Seller. That put me in the ideal position to have a candid conversation with them – completely independent of the Buyer – about the benefits of this coverage.
The stakes were pretty high… the difference between closing the deal and not.
At this point, let me stress that Buyers have their issues too. In the lower middle market, they can be somewhat cynical. They see appealing targets but also a lot of risk due to issues known and unknown – if not outright fraud – by the owners of those potential acquisitions.
So, to hedge their risk, they either seek an Indemnity Cap equivalent to the full purchase price or seek out transactional liability coverage. For the lower middle market, TLPE insurance is ideal and made even more effective by the addition of buyer protection coverage to protect against fraud.
TLPE insurance can be the key to getting these small but desirable deals done. At Rubicon Insurance, we have experience in this cutting-edge coverage and are standing by to answer your questions.
Please contact me, Patrick Stroth, at firstname.lastname@example.org.