M&A transactions are some of the most significant business deals for both the company doing the buying and the one being bought due to the potential risks and high costs involved.
As such, M&A insurance is crucial. This type of insurance ensures that your company is guaranteed payment and closure when it comes to major transactions.
In recent times, M&A deals have become increasingly complex. This is due to competition in the marketplace and demands from shareholders. Regardless of the reason, transactions are becoming riskier, and the best way to reduce this risk is to take out M&A insurance.
About M&A insurance
M&A insurance (sometimes known as transactional risk insurance) is a series of protections that help buyers and sellers close an M&A transaction and mitigate risk. For example, both parties are often worried about how the likes of taxes, litigation, and contractual guarantees may affect an M&A deal.
There are many types of M&A insurance policies available to buyers and sellers. These include:
- Warranty and indemnity insurance. W&I insurance protects either party from breaches of warranties and indemnities provided by the seller in the sale and purchase agreement.
- Tax liability. Tax liability insurance is a policy that ring-fences any assets and removes them from negotiations. As such, the seller does not have to give a warrant or indemnity on the tax issue. Incidentally, the buyer can no longer use the tax problem to lower the purchase price.
- Contingent liability. Buyers and sellers often disagree on the impact of contingent liability. This type of insurance can ring-fence this snag and ensure the target company has certainty regarding the outcome of certain events in the future, such as contractual disputes.
- Environmental. While many W&I policies cover compliance with environmental laws, they do not cover the cost of environmental clean-up. However, environmental insurance can provide adequate coverage for historical and future pollution or environmental damage.
- Title insurance. Title insurance protects either side from the loss coming from any defects or failure of title to the real property. This is most commonly attributed to real estate transactions, offering extensive coverage for a relatively low price. Interestingly, there has been a marked increase in title insurance policies for M&A transactions as well.
Benefits of M&A insurance
There are numerous benefits to buying M&A insurance. These include:
- M&A insurance reduces risk in your deal by transferring it to the insurance company.
- It facilitates the transaction by providing certainty for both buyers and sellers.
- It helps sellers get a deal over the line as the buyer assumes less risk in the transaction.
M&A insurance strategies
When a buyer submits a buyer policy with their M&A bid, the seller can limit their liabilities and achieve more favorable pricing for their company.
Additionally, if the financial capabilities of the seller to pay any future liabilities are in doubt, an insurer will be able to pay those liabilities. This is an attractive prospect for many buyers.
As such, this means there are no residual liabilities left unaccounted for, allowing for a quicker transaction that benefits both sides.
However, you need to remember that M&A insurance does not mean you can avoid the due diligence process. Insurers will scour deals before offering capital for reimbursement to either side. However, you should still conduct due diligence to ensure you reach the right deal for the right price.
To summarize, M&A insurance is crucial for those who wish to get an M&A transaction over the line with minimal fuss. With so many options available to both buyers and sellers, these policies offer a great way to protect investments and, if you are a seller, ensure the acquisition is financially beneficial.
However, even the most comprehensive insurance policy is not enough to complete a deal. You must perform strict due diligence to make sure you cover all bases and achieve a deal that is right for all involved.