Reducing Uncertainty with Insurance

Insights by Robert Fiske.

The aim of most vendors in a sale is to ensure that the price they agree is the price that they get paid. There are many elements to that depending on the deal structure, with all cash at completion as the gold standard.

However, even if you achieve this objective, you still run a risk relating to the warranties and indemnities that the buyer requires. If it turns out that these are incorrect in some substantial way, then you could be liable to a future warranty/indemnity claim.

Fortunately, claims are quite rare, and with that in mind it is not surprising that insurers are generally willing to offer cover. Private Equity firms use this routinely, sometimes to ensure that where an existing management team “banks a bit, and rolls a bit”, that they do not end up in future disagreements over the consideration paid, ensuring that all can remain focussed on driving future performance. It may also be used when Private Equity cashes out, as the PE fund will not want to accept potential future liabilities.

In the past, warranty and indemnity insurance has generally only been viable for larger deals, but it is now something that most sellers could consider, depending on their attitude to risk. It may be worth having this in your armoury, should you feel uncomfortable about the risk you are being asked to bear.

If you’re thinking about selling your business do join the next 1-hour live webinar we are presenting in partnership with Cambridge Network. We’ll be sharing stories and insights from our 20 years of M&A to help you prepare for a quicker and smoother sale process. Learn what steps you can take to avoid the potential pitfalls that can crop up along the way and reduce the chance of your sale becoming a disaster! “How to Avoid a Disaster When Selling Your Business” is taking place on Wed 24 April – it is free for Cambridge Network members and only £10+VAT for non-members.