In this frothy, seller-driven mergers and acquisitions market, representation and warranty insurance can help bridge the gap between a buyer and seller and facilitate deal-making.
In M&A transactions, a seller seeks to limit the extent to which a buyer will have recourse to a seller after consummation of the acquisition. In today’s middle market – $20 to $100 million deal size – it is not unusual for escrows or holdbacks to be as small as five percent to 10 percent of the cash purchase price, indemnities for breaches of representations and warranties to be limited to 10 percent to 15 percent of the cash purchase price, and time period for a buyer to make an indemnity claim to be as short as one year. A representation and warranty insurance policy can be purchased by a buyer to provide greater protection and enable that buyer to submit a more competitive bid for the business.