Reps & Warranties Insurance for Small Firms
In my previous videos on Reps & Warranties Insurance, I discussed how many mid-market M&A deals are done with R&W insurance to help smooth out negotiations and protect both the buyer and seller from potential breaches of the representations made in the purchase and sale agreement. Reps & Warranties Insurance for Small Firms is now available, which we’ll discuss below.
For the seller, Reps & Warranty insurance can help eliminate the need for escrow and give the seller peace of mind when they walk away from the closing table.
In the middle market, R&W is common, but in the small enterprise marketplace traditional R&W insurance has been too expensive and cumbersome to deploy.
CFC Underwriting a London-based specialty insurer has come out with a Reps & Warranties Insurance program for Small Firms which is affordable, easy to obtain, and focused on sellers.
This product is designed for firms with an enterprise value of between $250,000 and $10,000,000 and it is called Transactional Liability Private Enterprise.
As I mentioned, this product is for sellers only, and functions similarly to the middle market reps and warranty policy – that is to cover the seller against the risk that they must make an indemnity payment to the buyer for a breach of the representations made in the sale of their company. With this policy, the seller of a small business has the peace of mind knowing they can exit the business with the full proceeds of the sale, with no escrow set aside or at risk of loss from future claims made by the buyer.
Now while the Transactional Liability Private Enterprise policy or TLEP is similar to a traditional Reps and Warranties policy, there are some significant differences.
The first is that there’s no underwriting fee, which normally is around $30,000. In addition, there’s no underwriting call, no engagement of external counsel, and underwriting is typically completed in 2 to 3 days, versus the 5 to 10 days for a traditional R&W policy.
Defense costs and 100% of the seller’s indemnity are covered.
Finally, let’s talk about the premium and retentions.
In a traditional R&W policy the premium ranges from 3 to 4 percent of the insured amount plus your underwriting fee which I mentioned is normally in the $30,000 range.
Reps & Warranties Insurance for Small Firms or the Transactional Liability Private Enterprise policy is 1 to 2 percent of the insured amount or enterprise value and there’s no underwriting fee.
When it comes to retentions commonly called the deductible, the traditional R&W policy comes in between 1.5% to 2% of the target company’s enterprise value.
The TLPE policy retention is higher than 1% of the target company’s enterprise value of $10,000. Which I think you’ll agree is very reasonable and again a sign that this product is tailored for the small business market.
For a brief overview of how R&W insurance works in the real world, you can watch this video here.
To underwrite the TLPE policy, we need a completed insurance application and a copy of the purchase agreement. Once that’s complete, we forward it to CFC Underwriting, and in 2 to 3 days they return a quote to us for review.
Interested in the TLPE policy, Reps & Warranties Insurance for Small Firms?
My contact info is below, including a link to my calendar to schedule a time to chat about this product.
If you’re a business owner in the process of selling your business, it certainly can’t hurt to find out what this policy would cost and how it can offset the risks you face from the representations made in your purchase and sale agreement.
If you’re an advisor in the M&A community, focused on the small-sized enterprise market, this could be an excellent tool to help your buyers have a greater comfort level while exiting their business. Let’s connect!
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