Transaction Risk:

Representations and Warranties Insurance (RWI), is recognized as the fastest growing solution to facilitating closed transactions in the mergers and acquisitions market both in the US and Europe. M&A Risk Advisors plays a role as a specialized advisor with dedicated client advisors, customized delivery, and broad market access.

 

RWI facilitates transactions by transferring some or all of a Seller’s indemnification obligations for breaches of representations and warranties to a third-party insurer, which benefits both Buyer and Seller.  Buyers often obtain a policy to provide a competitive indemnity package to a Seller in an auction.  A Seller may obtain a policy to define their own indemnity exposure and to provide greater certainty and maximize gross proceeds of the sale after the transaction closes.

Coverage Highlights: 

  • Policies are typically written on transactions involving companies valued between $25 million and $2 billion.

  • Customized coverage for individual transactions is routinely available, including transactions $10 million and above on a case by case basis

  • Premium is generally 2% to 4% of the amount escrowed

  • Deductibles are typically 1% to 3% of the value of the transaction

  • Policy periods generally mirror the survival period of the representations and warranties as outlined in the M&A agreement 

Advantages for Buyers: 

  • Supplements indemnity provided by Seller’s for any breaches of reps and warranties

  • May distinguish a competitive bid in an auction by accepting lower than standard indemnification from a seller via the use of RWI

  • Protects relationships with the sellers’ key employees who may become the buyers’ employees in an earn-out

  • Reduces concerns about buyers’ ability to collect on sellers’ indemnity for practical or logistical reasons

Advantages for Sellers: 

  • Distributes substantially more net proceeds to sellers than in the typical escrow arrangement

  • Expedites sales and has the potential to increase purchase price by eliminating impediments to closing through reduction of negotiation costs

  • Protects passive sellers not involved in operating the business

  • Allows private equity sponsors the ability to distribute proceeds sooner and with less risk of claw backs

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