Planning to buy or sell a business? There’s a little-known insurance policy designed to protect your interests, says S-Tech’s Shaun Walker.
According to the Institute for Mergers, Acquisitions and Alliances, a huge 18,013 mergers took place in Europe during 2016.
The total value of these transactions exceeded €1001 billion, the largest of which was UK-based Vodafone AirTouch plc’s €204.79bn takeover of Germany’s Mannesmann AG.
Of course, the scale of this particular acquisition is extreme, but M & A activity of all sizes involves a variety of factors and inherent risks – whichever side of the transaction you’re on.
While you may thoroughly research the company you’re buying, have a solid share purchase agreement (SPA) and run due diligence checks, there will be warranties to satisfy. And this may be further complicated in cases where the buyer and seller are in different countries and are therefore subject to different legislation. It may be difficult, unreliable or expensive to enforce the SPA indemnities across borders.
If you’re planning to strengthen your position, diversify your business or build a customer-base in a new geographical location, you’re likely to be considering your acquisition options. And although you’re sure you won’t be caught out, because you’ve conducted all of the relevant due diligence and have a watertight SPA, you should still consider taking out specialist M&A insurance.
This niche cover is becoming increasingly popular and can provide protection for both sides of the transaction. The insurance is sophisticated and tailored to each individual case, with specialist underwriters, corporate and tax law professionals working to provide cover. This allows bespoke solutions to be provided within the tight timescales of an M & A transaction.
M & A insurances typically consist of warranty and indemnity insurance that cover both unknown liabilities and tax liability insurance, which includes identified tax risks.
It can be arranged for mergers of all sizes and limits are normally set as a percentage of the total value of indemnities. It can protect buyers against fraud by the seller too, up to the value of the entire purchase price, and can be accessed in the same jurisdiction as the policyholder.
For instance, your SPA might provide warranties for typically two, three, or in the case of tax, seven years. However, if something goes wrong, insurance could help recover any costs – for example, if the shareholder due to pay indemnities hasn’t put funds aside to cover these costs.
However, you could claim on an M & A policy if one was in place, even if the seller was in a different jurisdiction.
And if you think about it from the seller’s perspective, it also provides them with peace of mind because they can get on and spend the proceeds of the business sale.
• At S-Tech, we’ve arranged M & A insurance with specialist underwriters for many years, working with a wide variety of businesses. To discuss how the cover works and could protect your next acquisition, don’t hesitate to contact me on 01223 445415.
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