M&A transactions are complicated and often fraught with risk. As your client looks to you as a trusted advisor during a business sale, what advice can you offer them to make sure they exit with the sale-price proceeds in their pocket?
Here are 4 key things you should know when your SME client is selling their business, and the important role of M&A insurance in facilitating their deal.
The buyer can claim against your client even after the deal closing
During an M&A transaction, SME owners can be mistaken in thinking that their contractual obligations are complete once the deal closes. However, many risks in M&A come after the deal closes and may not arise for a significant amount of time. In fact, a buyer can make a claim against the seller for breach of sale contract up to 6 years after the business has been sold!
If a buyer asserts a breach of a representation or warranty in the sale contract, the seller would be responsible for defense costs, as well as reimbursing the buyer for the loss suffered if the claim is valid or settled.
For some small business sellers who don’t have adequate protection in place, they risk having to hand back some, or all, of their proceeds.
Innocent misrepresentations can damage a deal
One of the biggest risks when it comes to M&A transactions is innocent misrepresentations. An innocent misrepresentation is a statement by the seller that is neither fraudulent nor negligent, but that is still untrue. Often unknowingly. Your client may claim to know their company inside out, but in an evolving and fast-changing regulatory environment, even the most well-intentioned seller can have blind spots. These accidental misrepresentations can still be claimed against after the deal is done and the seller would be responsible.
Existing insurance is unlikely to provide adequate cover
Many SME sellers will have E&O or D&O cover for their businesses, but they can be caught off guard when they learn those policies won’t protect them during the sale of their business. The most common misunderstanding is that D&O policies will cover breach of representation in a sale, which is almost universally untrue.
M&A insurance can really help small deals
A key benefit of M&A insurance is that it provides SME sellers with cover for indemnity and defense costs arising from a claim, giving sellers peace of mind should the worst happen. It can also help the seller negotiate to reduce, or eliminate, their escrow obligations and unlock the sale proceeds immediately after the deal closing. In many cases, M&A insurance can even put the seller in a better negotiating position and enable them to maximize the sale price of their business.
CFC recently launched a first-to-market transaction liability policy created specifically to protect small business sellers in M&A deals.
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