The last two years have been a busy time for mergers and acquisitions. The ripple effect from COVID-19 has cast a large net over our economy in positive and negative ways. Some companies are bursting at the seams struggling to find people to fill jobs, and other companies are either slowing down or unfortunately, failing due to the pressures of COVID-19. Because the valuation of many of these companies is lower, several acquisitions and mergers are taking place.

“We’re seeing two sides of the result of COVID on the business sector,” explains Josh Kearley, Commercial Account Executive/Program Specialist at Benson Kearley. “There are businesses that are slowing down and then there are businesses that are selling like crazy. What’s interesting is that both of these streams are driving an increase in mergers and acquisition.”  

While this can be a great opportunity for buyers looking to invest in a new opportunity, these sales don’t come without risk. 

Once a target is purchased by a buyer, and the buyer inherits assets, clients, equipment etc., the only guarantee the buyer has that their investment is secure is the information provided by the seller during the disclosure and negotiation process. The Representations and Warranties made by the target are what is included in the SPA (Share Purchase Agreement).  

While the buyer can review all statements, pitch decks, and paperwork with their lawyer and 3rd party consultants to ensure all has been disclosed before the deal closes, some things can still happen post-closing.

Understanding The Importance of Representation and Warranties Insurance

Inaccuracies in representations and warranties made by the seller during a merger or acquisition can result in costly liabilities. 

Often referred to as “transaction insurance”, “R&W”, “RWI”, or “reps and warranties”, representation and warranties insurance offers more transparency as to the complete landscape of a business. 

Transaction insurance protects against unanticipated breaches of representations and warranties and other matters that may require compensation from a seller.

During COVID-19, more and more of these cases have arisen due to fear, rush of sale, and the pressures of lockdown. 

When sellers are strapped for cash and feel as if they are failing, there is arguably less time to prepare statements and give a proper handoff. There is also a higher likelihood that sellers may not disclose certain issues that could prevent the sale from going through. 

With Representation and Warranties insurance, instead of incurring legal costs to pursue potential disputes, this policy takes those matters into account and is secured via a deductible, just like a homeowner’s policy. 

“In 2020 and 2021 we saw more transactions, R&W insurance policies, and claims than we have in the past 5 years combined due to the frequency of these types of deals. The only way to protect your investment through risk Financing is Reps and Warranty Insurance.” says Kearley.

The Case For Representation and Warranties Insurance

During this turbulent COVID-19 period, we have seen the following representation and warranties insurance claims by business purchasers: 

  • Accuracy and completeness of financial statements
  • Compliance with laws
  • Tax Implications

In response, representation and warranties insurance has been used to:

  • Overcome differences between a buyer and seller on the assessment of risk
  • Enable parties to release or utilize their sale proceeds
  • Break a deal deadlock
  • Satisfy lenders

Obtaining Representation and Warranties Insurance

Should you wish to obtain representations and warranties insurance before you purchase a business, BKIFG will help you fill out the application and explain the process along the way. 

 Through our Benson Kearley IFG assessment process, we consider:

  • Clear financial statements
  • Tax status
  • Material contracts
  • Undisclosed liabilities
  • Labour 
  • Employment matters

Our underwriters will provide a comprehensive breakdown of each consideration, ensuring transparency. 

In the event of a claim, you can be assured that our representation and warranties insurance coverage will address all necessary details. 

Contact BKIFG For RWI Insurance

Representation and warranties Insurance ultimately protects the investment you are making in growing your business. 

Reps and warranties can also be used to overcome any differences between a buyer and seller on the assessment of risk. However, it is important to note that RWI is not a replacement for due diligence.

Make your smartest business move and get in touch with us today to get your R&W quote.