Going beyond the representations and warranties provided by the seller: that is the purpose of M&A insurance, which is now becoming more widely adopted. As a true protection tool, it allows the seller to be covered against potential unexpected issues, while reassuring the buyer about the solidity of the deal. An effective solution, provided one understands its legal intricacies. Explanations and analysis by the experts at AURIS Finance, a consulting firm specializing in mergers and acquisitions.
The role of M&A insurance
At the time of a sale, the seller commits to the state of the company being sold: tax, social, environmental, regulatory compliance, or contract validity. If an issue arises after the transaction, compensation for the buyer is typically the seller’s responsibility. M&A insurance introduces a third party into the process. In the event of a proven post-closing risk, the insurer steps in for the seller and assumes the financial responsibility, within the limits set out in the policy.
Facilitating a “clean exit”
For the seller, this insurance guarantees the ability to move on quickly. For the buyer, it ensures they can obtain compensation by turning to a solvent third party. The insurance can be taken out either by the seller or by the buyer.
- The buy-side policy is the most common. It is taken out by the buyer, who is the direct beneficiary.
- The sell-side policy is taken out by the seller, who is therefore protected against potential claims from the buyer.
The cost of the premium may be borne by the buyer, by the seller, or shared between both parties, depending on the negotiations.
What risks are covered?
There are two main categories of risks in M&A insurance.
- Identified risks, meaning disputes or liabilities already known before the signing of the transaction.
- Unidentified risks, meaning events or liabilities unknown at the time of the transaction. This is precisely where M&A insurance proves its full value.
For the buyer, the preliminary phase of the transaction remains decisive. It makes it possible to map out the risks in order to determine which can be insured. This approach requires the support of advisors or brokers, as each transaction calls for a tailored solution.
When should the policy be taken out?
In an M&A transaction, timing is crucial. The same applies to taking out insurance. The policy must be arranged before the signing of the transaction, generally around three weeks in advance. This timeframe allows the insurer to assess the risks and propose a tailored solution. This is very often the stage at which the insurance broker becomes involved. It should be noted that the later the process is initiated, the less opportunity the buyer has to engage in discussions with the insurer to optimize pricing.
Smaller transactions are also concerned
While M&A insurance was long limited to very large transactions, it is now opening up to mid-cap and small-cap deals. This is due to the arrival of new specialized players capable of offering simple solutions for smaller transactions (from €5 to €10 million). Deals between French entities now have real room for growth: while 70% of transactions in the United States and the United Kingdom include M&A insurance, only 30% of deals in France currently do. The trend today is one of catching up, with more and more funds and investment banks becoming familiar with this tool.
Our experts by your side
While M&A insurance offers many advantages for both sellers and buyers, its implementation requires expert support. AURIS Finance’s specialists, organized by sector, support you in the legal, tax, and financial structuring of your insurance contract.
Contact us for further information.
