Deal values hit by financial discrepancy claims

COMPANY sellers are facing a new hurdle as buyers seek to recover damages for financial discrepancies on the cusp of completion.

According to research by insurance broker Aon there has been a 60% increase in enquiries for warranty and indemnity (W&I) insurance.

If statements (called warranties) made by the seller about the state of the business and assets of the company are incorrect the buyer can recover damages from the seller up to an agreed financial limit.

W&I insurance covers liabilites incurred when a company or its assets changes ownership thereby offering protection from any claims.

Aon said that with both private equity (PE) and corporate buyers feeling the pinch, the current trend for W&I claims for accounts and tax discrepancies would continue and that the number would undoubtedly rise.

It warned that buyers were looking at areas where they could recoup some of the purchase price through a warranty claim, be it over accounts, litigation, employees or stock.

In particular, claims are being brought after signing but before completion (after the insurance has been taken out) which sellers maintain is an attempt to reduce purchase prices.

Anka Taylor, director of Aon’s transaction liability unit, said: “Never before has the M&A community been more in need of every strategic tool available to get deals done.

“Deals that could create real value are frequently blocked for reasons that do not reflect their underlying worth. Insurance products cannot solve the myriad of economic issues that we now face but it may be worth having a look at them in a fresh light to see if they can assist you in getting that deal over the line.”

Sellers are now looking at how insurance options can secure the deal with minimal cost.
PE sellers may be forced to give warranties to ensure a sustainable sale price but can insure that liability to release funds to investors.

Buyers concerned about the financial worth of the seller’s covenant during a distressed sale can opt for a contingent insurance policy if the seller defaults.

The funding bank requires greater warranty protection than previously expected so a buyer policy can be arranged to sit above the seller’s indemnity cap.

A selling liquidator may only give very limited warranties (in time or extent). Insurers will now consider cover for buyers to extend both time and breadth for additional comfort.