A client is selling his business after 20 years of hard work, and is in the final negotiations with a quality buyer. The buyer has raised the issue of our client looking into Representations & Warranties Insurance for the transaction–what’s that?!
This is insurance purchased either by or for the seller or the buyer in a business transaction, and the purpose is to add certainty and security to the transaction, for both buyer and seller. Here’s how it works.
In a typical transaction involves a “purchase agreement” which among other things includes “Representations and Warranties” (RW’s) both of the seller and of the buyer. Those RW’s being true are part of the basis for the valuation of the company being sold and therefore the price being paid by the buyer.
In order for the buyer to secure itself against RW’s that aren’t true, he will typically ask that money from the transaction be put in an escrow account for an agreed upon period of time, perhaps 18 to 36 months.
This can be a problem to the seller who would like to leave the transaction behind, and move on with his money.
This is where the Representations & Warranties Insurance (RWI) serves a useful purpose.
The policy can be purchased, either by the seller or the buyer, and provides security for the buyer and certainty for the seller.
The underwriting process will involve an independent legal review of the Purchase Agreement and Disclosure Statements which can be costly. From that review there is likely to be recommendations for changes in the agreement, and a premium for the coverage with a deductible.
Leave a Reply