Company sellers are facing a new hurdle as buyers are increasingly seeking to recover damages for financial discrepancies on the cusp of completion, and as a result, according to insurance
Company sellers are facing a new hurdle as buyers are increasingly seeking to recover damages for financial discrepancies on the cusp of completion, and as a result, according to insurance broker Aon, there has been a 60 per cent increase in enquiries for warranty and indemnity insurance as a seller’s weapon in a buyers’ market.
When a company is sold the selling shareholders usually provide the buyer with warranties about the state of the business and assets of the company, offering reassurance for the buyer about what they are buying. If they are incorrect the buyer can recover damages from the seller up to an agreed financial limit. Warranty and indemnity insurance covers liabilities incurred when a company or its assets changes ownership.
With both private equity and corporate buyers feeling the pinch, the current trend for warranty and indemnity claims for accounting and tax discrepancies is set to grow, Aon says. Buyers are looking at areas where they can recoup some of the purchase price through a warranty claim, whether over accounts, litigation, employees or stock. Notably, claims are being brought after signing but before completion (after the insurance has been taken out) in what sellers see as a stratagem to reduce purchase prices.
Sellers are now looking at how insurance options can secure the deal with minimal cost. A warranty and indemnity policy can support the seller in the various scenarios, such as where private equity sellers may be forced to give warranties to ensure a sustainable sale price but can insure that liability to release funds to investors.
Buyers concerned about the financial worth of the seller’s covenant during a distressed sale can opt for a contingent insurance policy if the seller defaults.
Another scenario is where the funding bank requires greater warranty protection than previously expected, so a buyer policy can be arranged to sit above the seller’s indemnity cap. Finally, where a selling liquidator may only give warranties very limited in time or extent, insurers will now consider cover for buyers to extend both time and breadth for additional comfort.
‘Never before has the M&A community been more in need of every strategic tool available to get deals done,’ says Anka Taylor, director of Aon’s transaction liability unit. ‘Deals that could create real value are frequently blocked for reasons that do not reflect their underlying worth.
‘Insurance products cannot solve the myriad of economic issues that we now face, but it may be worth having a look at them in a fresh light to see if they can assist you in getting that deal over the line.’
Aon Corporation is a global provider of risk management services, insurance and reinsurance brokerage and human capital consulting, with 36,000 employees in more than 500 offices in around 120 countries.
