M&A Insurance and Small Business Exits
If you’re a small business owner and you’re thinking of selling your business, you may never have heard of M&A insurance or Reps and Warranties insurance; so you may not know how to answer the question in the title of this video is this kind of insurance right for your deal.
I get it– the small and medium-sized enterprise has been left out of the M&A insurance world. It’s complex, it’s expensive and it’s difficult – not the types of things that many small and medium-sized business owners want to deal with. Let me give you a quick summary of what reps and warranty insurance is and what it does for the seller of a company.
R&W as it’s called, protects the seller from claims a buyer may make, post-close, for breaches of the reps and warranties section of a firm’s sale agreement.
Commonly, sellers need to place a percentage of the proceeds – usually around 10% – into escrow for two or more years to secure the representations made in selling their business.
Larger mid-market firms frequently will purchase Reps & Warranties insurance so that they can avoid an escrow set aside and the downside risk of litigation and potential settlements.
But, the small business market has not had this type of M&A product available to them until now. You can learn more details about this product here.
So is this form of M&A Insurance right for the small business owner selling their firm?
In my opinion yes, and here’s why.
First, this is probably the only sale of a business you will have in your career. Unless of course, you’re a serial entrepreneur.
Reps & Warranty insurance can give you peace of mind when you walk away from the closing table, knowing you’re protected. The last thing you want to worry about is – will the buyer try and hold me responsible for even an honest mistake or misrepresentation? Will I have to reimburse the buyer for the damages an accidental inaccuracy of the representations made in selling my firm? How much could I be at risk?
With R&W insurance, you’ve got peace of mind and don’t have to worry about these issues.
The proceeds of the sale of your business are protected and this insurance removes the escrow requirement sellers often face. You walk away with 100% of the proceeds from the closing table and have peace of mind.
Second, you may think that your D&O policy will protect you from potential claims of this nature.
Unfortunately, not true. D&O policies commonly exclude claims arising from contractual breaches, meaning that any claims arising from a breach of a representation given to the buyer will not be covered.
Lastly, if a breach does occur and the buyer initiates a lawsuit do you want to hire an attorney and deal with this and slog it out in the courts? Probably not.
You may have taken the proceeds of the sale and started a new business, or moved onto the retirement segment of life and the last thing you want to do is now assemble a defense, hire a law firm, pay a retainer out of pocket and go to war. Not pleasant and not productive.
Using R&W insurance, the insurer has a duty to defend you with expert legal counsel skilled in these types of claims. Your financial exposure in a claim is the retention in your policy – typically $10,000 or less. Ultimately the insurer has a joint interest with you to settle the matter quickly and efficiently.
Here’s the bottom line.
If you’re selling your small business, I think it makes sense to at least get a quote on R&W insurance and do the cost/benefit analysis. It’s fast and easy and doesn’t cost you anything.
Give me a call or drop me an email. In fact, there’s a link below in the description box where you can book a call directly on my calendar and let’s chat.