Mergers & Acquisitions Transaction Liability Insurance
Why Your Business Needs M&A Transaction Liability Insurance
Selling or buying a business can be very rewarding. But it also comes with several challenges and risks, one of which is exposure to the warranties you will need to provide in your share or asset purchase agreement.
M&A transaction liability insurance is developed to protect sellers and buyers of SMEs against financial loss due to incorrect warranties given by sellers in a share or asset purchase agreement, or issues appearing after the sale which may trigger a warranty claim by the buyer.
It includes coverage for defence costs.
Why Get M&A Transaction Liability Insurance From Aspect SME Insurance?
Most insurance policies of this type cover only a limited percentage (that is, 10%) of the business value. Aspect SME Insurance can arrange a policy that insures the full exposure of the seller in the sale agreement, for up to $10 million.
For Sellers
Seller side coverage is a form of liability policy, covering the seller’s liability for claims of breach of a representation or warranty. Such policies cover defence costs and are much cheaper and quicker to procure. With a retention of $10,000, such a policy for a sale of business valued at $10 million may cost the seller less than $5,000 to procure. Some Insurers offer full indemnity given by the seller in the sale agreement, up to AUD$10 million which may be up to a limit of up to 100% EV.
The benefit of this policy may extend to private equity or venture capital funds at the end of their life cycle. SME owners/ family sellers may find this policy particularly attractive.
Before purchasing a M&A Transaction Liability Policy, consider:
Coverage:
Which warranties and representations are covered and which are excluded – for example, Tax Liability inclusion may be required by the buyer
Limits:
What is the maximum enterprise value limit available? These may range from 10% – 100%.
Retention:
What is the retention or out of pocket expense on
the policy for Seller of Buyer.
M&A run off policies
Professional services firms selling or merging with other businesses aren’t required to get policies for their business once the merger is complete. However they may still be liable for claims for work done in the past or for any mistakes or actions of Directors and Officers.
In such circumstances a run-off cover is recommended on existing policies prior to merger which may offer cover for up to 7 years.
The merged entity may also ensure that their policies have unlimited retroactive cover and list merged entities on their policies – should the new merged entity be sued for past deeds of these
merging entities.
Selling your SME? Consulting an insurance advisor is recommended, so book a free call today to find out how we can help facilitate a successful and safe exit for your business.