LIMITING SELLER’S LIABILITY FOR REPRESENTATIONS AND WARRANTIES WITH INDEMNITY INSURANCE
Business owners want to sell their business and not have to look back or worry about past liabilities. Buyers want to make sure they are not acquiring unknown liabilities. This tension may be resolved through the purchase of representation and warranty insurance. Buyers are the ones who generally purchase this type of insurance (80%) versus Sellers (20%). Insurance may be purchased to cover all R&Ws, or for just specific R&Ws such as taxes or environmental liability. Premiums generally range from 2 to 4 percent of the coverage limit, and there is a deductible equal to 1 to 2 percent of the purchase price. For example, if the purchase price is $50M and the Seller’s liability cap is $20M, the premium would be between $400k and $800k with a deductible of $500k to $1M. Sellers should also be fully aware of the fact that maintaining post-closing ordinary course of business liability insurance policies consistent with their prior operations will also greatly reduce their exposure to R&W liability.
The M&A market has seen an uptick recently and there is a lot of buyer interest in finding quality businesses to buy. I will make sure that Buyers and Sellers who engage in a transaction will have all the tools available to insure the successful completion of their transaction.
Please do not hesitate to contact me with any M&A questions you may have or if I can assist you in any way with the sale of your business or a client’s business. Additional information can also be found in my e-book “BUSINESS OWNERS GUIDE TO SELLING A BUSINESS” on my web site.