INSURANCE
Advice – Erimus Insurance Brokers commercial director Paul Davison .
Don ’ t let your business sale become a liability
PICTURE : TOM BANKS
Paul Davison , commercial director at Stockton-based Erimus Insurance Brokers , explains how having the right cover can mitigate some of the risks that come with selling your business
The Mergers & Acquisition ( M & A ) market has been an unexpected “ phoenix from the ashes ” of 2021 . With economists predicting a V-shaped recovery from the pandemic , there is increased optimism surrounding the economic outlook , which has led to deals and trades being on the rise .
Whether you are an entrepreneur looking to move on to a new venture , or you are hoping to release equity from your business to fund retirement plans , the sale of a business does not come without risk .
Warranties and indemnities put in place while negotiating the sale of the business can lead to longtail financial liabilities for the seller should a breach occur .
In order to mitigate the financial risks associated with a breach of warranty , sellers can purchase a transaction liability policy .
Transaction liability , also known as warranty and indemnity insurance , or M & A insurance , is designed to protect against financial loss arising from an inaccuracy in a warranty given by sellers in a share or asset purchase agreement .
Historically , transaction liability has been prohibitively expensive for small and micro enterprises . However , a new product , Transaction Liability Private Enterprise ( TLPE ) insurance , is now available to the SME market . We are pleased to announce that Erimus Insurance Brokers has access to this new product and can source quotations for sellers .
The insurance covers loss or liability arising from unknown or undisclosed matters and indemnities at the time of the sale . Following completion , the insurer effectively “ steps into the shoes ” of the seller and becomes financially liable for certain breaches should they occur .
Each transaction liability policy is tailored to meet the specific needs of a transaction and the underwriter will review the sale contract before accepting a risk . It is important to note that transaction liability does not replace a robust due diligence process , instead it works in parallel with the negotiations .
A transaction liability policy is a nonrenewable , single premium product , with a policy period of up to seven years .
What does Transaction Liability cover ? Breach of warranties Transaction liability provides cover for financial loss or liability arising from a breach of a warranty given by sellers in a share or asset purchase agreement . Defence costs A transaction liability policy provides cover for defence costs arising from the claim of an inaccuracy in a representation or warranty . Full indemnity policy limit Transaction liability for larger companies typically provides a policy limit of 10 per cent of enterprise value ( EV ). SME transaction liability insures the full indemnity given by the seller in the sale agreement , up to £ 10m , meaning you can obtain a limit up to 100 per cent EV . Duty to defend
Underwriters have a duty to defend , giving policy holders the benefit of sophisticated legal advice and representation in the event that a buyer makes a claim against them for a breach of warranty given under the sale contract after “ representation ”.
How could a claim arise ? A claim following a breach of a warranty or indemnity can occur in many different ways , whether from miscalculations on accounts or failing to comply with regulations while trading . Often , these issues are discovered once the buyer has taken control of the company and is performing an audit on the purchase .
Example – a regulatory breach A private investor bought a chain of franchised fast-food restaurants . Shortly after the purchase , a claim was lodged against the company by the regulator for breaching working hours regulations . The breaches occurred while under the control of the previous owners and constituted as a breach of the warranties and indemnities of the sale . The new owner brought a claim against the seller for damages .
If you are interested in arranging a transaction liability policy , or would like additional information , please contact Paul Davison on 01642 309511 or pdavison @ erimusib . com .
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