By John Weatherford, senior vice president, M.E. Wilson
Mergers and Acquisitions (M&A) are complex transactions that require a great deal of planning, due diligence and execution. One aspect of M&A that is often overlooked is the insurance expense. Insurance plays a crucial role in the success of any M&A transaction and insurance expenses should not be underestimated or ignored. Insurance expenses are an important aspect of M&A transactions and should be considered from the early stages of the transaction.
Insurance can help mitigate the risks associated with the transaction and provide peace of mind for all parties involved. Insurance can also help ensure that the transaction is completed smoothly, without any unexpected surprises.
One of the most critical aspects of insurance in M&A transactions is due diligence. Due diligence is a comprehensive investigation of the target company, its financials, operations and liabilities. It is crucial to review the target company’s insurance policies and coverage to determine the level of risk involved in the transaction. This information can then be used to negotiate the purchase price, determine the structure of the transaction and assess the potential impact on the acquiring company’s existing insurance policies.
Another important aspect of insurance, in M&A transactions, is liability protection. Liabilities can arise from a variety of sources including environmental, product and employment issues. Liabilities can also arise from the activities of the target company, prior to the transaction. It is crucial to understand the potential liabilities and to ensure that adequate insurance coverage is in place to protect against these risks.
Finally, Representations and Warranties (R&W) insurance is being purchased more by companies to cover potential liabilities arising from the transaction. Under the terms of a typical M&A deal, sellers carry the risk for any liabilities which occurred while they owned the company. If these issues are discovered after the transaction completes and cause financial loss, the seller is often financially responsible.
Your risk can be reduced by taking out an R&W insurance policy. R&W insurance, which is available to both buyers and sellers, is designed to reimburse the buyer for any financial loss resulting from any inaccuracies in the representations and/or warranties given by the seller and to free up sale proceeds for the seller.
By transferring risk to the insurer, R&W insurance can be used to:
- Enhance potential buyers’ bids by minimizing the indemnification the seller provides to the buyer.
- Smooth the transaction process by simplifying the negotiation of the representations and warranties.
- Reduce credit risk on the part of the buyer, since the buyer can claim against the insurer rather than any number of sellers.
In conclusion, insurance plays a critical role in M&A transactions and should not be overlooked or underestimated. Insurance expenses are an important aspect of M&A transactions and should be considered from the early stages of the transaction. Insurance can help mitigate the risks associated with the transaction, provide peace of mind for all parties involved and ensure that the transaction is completed smoothly. As an insurance broker, M.E. Wilson understands the importance of insurance in M&A transactions and can help ensure that all parties involved are protected.