Risk and Insurance support for Mergers and Acquisitions

Whilst legal and financial due diligence is routinely undertaken when a business is being bought or invested in, the risk/insurance side of the business is often overlooked during the buying and selling process. This is despite the fact that there is a huge amount of valuable information and advice to be obtained by carrying out such work. Indeed, the information could have an effect on the purchaser’s decision as to whether to buy or not and at what price. In addition, there may be insurance solutions (available to either the buyer or seller) to ensure that the transaction can safely proceed.

Services for the Seller

Risk & Insurance Due Diligence Service to prepare a company for sale
By carrying out risk/insurance due diligence exercise in good time prior to a sale, any issues or deficiencies in the risk and insurance programme can be identified and measures put in place to remedy. This can be through correct programme design – making sure the programme meets the business risks and delivers value for money or looking to see if there is a better way of addressing the risks within the business. For example, it may be possible to transfer some risks to others contractually, thereby reducing the cost of risk in the business which in turn reduces the risk cost ‘run rate’ and increases the sale value of the business accordingly.

The cost of risk (premiums, uninsured risks, self-insured risks etc) devalue a business but if the risks can be minimised, with reduced cost of risk for a buyer, then the sale value can be maximised. In general, potential investors will not wish to pay a premium rate to buy a business containing potential uninsured liabilities.  By identifying and resolving any issues early on, potential buyers/funders can take comfort they will be investing in a business which has taken the initiative to reduce future risks.

Services for the Purchaser

Risk and Insurance Due Diligence Service for purchasers
Any prospective purchaser buying a business normally wants to know if there are “hidden risks” as these can seriously impact on the future financial position. These maybe unknown to the seller as many do not fully understand the insurance protection they buy and very often, their programme is not suitable for their needs. By carrying out a risk/insurance due diligence process, these issues can be identified prior to sale and if necessary, the sale price adjusted accordingly and/or corrective action taken in order to protect the purchaser’s position.

This process can range from a brief appraisal of the current insurances and records of past cover through to a full and in-depth risk and insurance review looking at all the activities of the business, the approach to risk, the issues identified and our recommended solutions to address the issues.

Insurance solutions for transactions

Very often, in order for a transaction to proceed, a buyer will require certain protections in place in the sale contract to provide them with a comfort that if certain circumstances occur, they will be protected from financial losses by the seller. If the seller does not want to carry the financial consequences or if the buyer is not confident that the seller can or will meet these costs, there may be a need to transfer these risks to an insurer. There are a number of solutions available for the typical issues that are encountered. These covers are very much bespoke to the transaction in question and are individually underwritten based on the information provided.

Litigation Buy-out Insurance

Litigation Buy-out Insurance enables a client to “ring fence” liabilities which may arise from any current or anticipated litigation, arbitration or other dispute. The spectre of legal action could jeopardise a sale or impact on its value and it may be possible to transfer this potential liability to an insurer.

Warranties & Indemnity Insurance

Warranties and Indemnity Insurance will provide cover against a loss arising from a breach of warranty or tax deed/covenant in a Sale and Purchase Agreement.

Tax Liability Insurance

Tax Liability Insurance can eliminate or reduce a loss arising from the successful challenge by the tax authorities of a taxpayer’s tax treatment of a transaction or investment.

Property Contingency Insurance

Sales involving property can run into difficulties where investigations indicate there may be outstanding “issues” on these properties. These can range from issues around the correct title or ownership, potential easements and/or covenant issues and the threat of such things as Chancery Repair liabilities. It is possible in most cases to transfer these potential liabilities to an insurer thereby covering off the financial consequences and enabling the business sale to continue.

 

For further information, help or advice, please contact us by clicking here.

(Article sponsored by Marc Sherry of Towergate Partnership Ltd)

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