In any Merger & Acquisition transaction, there are typically many risks, known and unknown, for the buyer and the seller. These risks can derive from incorrect assumptions or unverifiable variables such as issues with customer contracts, employment agreements, intellectual property, or even excessively optimistic information built into the company’s pro-forma financial models.
This type of risk has historically been managed by requiring one party to place funds in escrow, typically the seller, to cover associated expenses should they arise after the deal is closed. This can have an immediate impact on the seller’s return, tie up cash in escrow for years or even prohibit many deals from getting off the ground in the first place.
Representations & Warranties Insurance Coverage is a unique tool designed to alleviate these risks by transferring risk in an M&A transaction to a third party for a premium. This provides a clean exit for the seller and frees up monies that would otherwise be tied up in escrow. Often it provides a mechanism to get the deal done when cash collateral is not available.
Coverage and terms are flexible with each policy to accommodate the needs of each deal. Payment of the premium can be negotiated into the terms of the M&A deal between the buyer and seller.
To learn more, contact a VFCA agent today at info@vfcadvisors.com.