Mergers & Acquisitions (M&A) insurance is designed to protect you from breaches of promises during the deal process.
Yet despite the significant cost of a collapsed deal, this form of cover is commonly overlooked – particularly by SMEs who aren’t always aware of the risks involved in selling a business.
So, to help raise awareness of the potential pitfalls you could fall into, we’ve highlighted three common objections to taking out M&A insurance and how it can help.
We’ve heard it time and time again. It’s your business, after all – you’ve run it carefully for years and never had an issue. Surely you’d have noticed if there was something amiss about your business that could impact the deal, right?
Wrong. No matter how much care and attention you give your company, the economics of business are eternally complicated and exist in a wider, often volatile ecosystem. Markets dip, regulations change, and new threats emerge. For instance, how many people genuinely anticipated a pandemic until the day it happened?
No one expects you to forecast the next five years of your business’ success with 100% accuracy. However, without M&A insurance, if you were to innocently miss something in your representations during the negotiation, you could be in breach of a warranty and have the money clawed back by the purchaser.
While it’s crucial to have trust in the company that’s looking to buy your business, it’s also important to remember that they’re a different entity with their own aims and interests. The directors have a duty to do what is right for their shareholders. So while they may appear reasonable, there will come a situation where they would be compelled to act – and a breach in representations is one of those situations.
Buyers will purchase businesses for various reasons, but usually there is a focus on getting suitable returns on investment. This adds pressure to the relationship as an underperforming business is likely to trigger a breach. The seller could become part of the larger entity during earn out – in which case, one party can take action to recoup losses, potentially causing friction you’d rather avoid.
M&A insurance is particularly useful here as the buyer can just claim under the policy in the event of a breach, instead of having to recoup everything from the seller themselves. And no matter how nice anyone is in the beginning, bear in mind that boards change. The people you were dealing with at the outset could change post-acquisition, bringing with them ulterior motives.
Again, the business purchasing your company is not like you. It’s often larger and more capable of sustaining losses, not to mention funding expensive litigation. In other words, they’re capable of absorbing losses as a business risk and subsequently more likely to be comfortable without insurance.
This is especially true if the agreement involves withholding a portion of funds in escrow for a period of years, which could be forfeit following a breach. Terms such as this highlight the extent that the seller is in a more vulnerable position. They will be the party that suffers if the escrow funds return to the purchaser, and they would be the one in a financial hole if they have to pay back monies received under the terms of the agreement.
Think about it. If there’s a dispute where the buyer believes there has been a breach but the seller doesn’t, which party can afford the better legal counsel? M&A insurance can be taken out by either party, so even if the acquiring company doesn’t wish to purchase it, there’s no reason why the seller can’t obtain cover themselves to protect their interests.
Can you afford not to take it?
M&A insurance places an expert in your corner in the event of a breach. This way, any financial loss you suffer can be mitigated against and you’re more able to afford legal advice. Overlook it, and you run the risk of a significant blow to your cash flow.
For more information about M&A insurance and how you can use it to cover your own organisation, call us on 0161 533 0411 or fill in our contact form and we’ll be in touch.
Photo by Mario Gogh on Unsplash
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