Reps & Warranties Coverage Scenarios

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The Clean Exit

R&W allows sale proceeds received by the seller to be retained by the seller with little or no escrows, indemnities or tail liabilities. This gives the seller the freedom to reinvest or distribute the sale proceeds to its investors faster. 

Distinguishing Bid in an Auction

R&W enables a buyer to enhance its bid by offering a reduced seller indemnity and escrow relating to breaches of the seller representations and warranties. This occurs on the basis that the R&W coverage will provide the buyer with additional recourse beyond that provided by the sellers in the transaction documents. 

Bridging the Gap Between Seller and Buyer

When buyers and sellers in a deal have different expectations or requirements regarding the size, duration and scope of contractual indemnities, such disparity is often a heavily negotiated matter and can even cause the deal to collapse. R&W can bridge this gap. 

Financially Distressed Seller/Dispersed Shareholders

R&W can alleviate concerns about the ability to enforce or collect on an indemnity against a financially distressed seller or geographically dispersed shareholders. R&W can insulate the seller from a discount to the selling price caused by concerns over the collectability of the seller indemnity after closing. The use of R&W results in the financial strength of the insurer standing behind the seller’s representations and warranties. 

Unwillingness to Sue the Seller

When a buyer retains as key employees certain principals of the seller, maintaining a good relationship with these employees is often critical to the success of the acquired business. This is also true when the selling entity is going to be an important customer of the buyer after the acquisition. R&W can be structured so that claims for breaches are made directly against the third-party insurer, not the seller or selling shareholders. This gives the buyer recourse for a breach when the buyer is unwilling to pursue its claim against the seller. 

Entrepreneurial Exit/Protection of Family Assets

R&W enables entrepreneurs to sell a business and complete their tax or estate planning with reduced concerns over any claims against the sale proceeds. 

Facilitate Financing or Subsequent Sale

A buyer’s R&W policy can often be assigned to a lender or subsequent purchaser of the acquired business, thus enhancing the value of the acquired business by facilitating financing or eliminating the concerns of a potential buyer. 

Protection Against Seller Fraud

A buyer’s R&W policy can cover losses resulting from seller fraud, provided the buyer had no knowledge of the fraud.