In the first installment of this post, we looked at a few ways buyers can protect themselves in M&A transactions, including conducting proper due diligence, defining the scope of the transaction, and negotiating strong representations and warranties. Below are a few additional measures buyers can take to ensure a successful transaction and provide recourse in the event of any issues post-closing.
Obtain Escrow or Holdback:
An escrow or holdback is a portion of the purchase price that is held back by a neutral third party or one of the parties’ attorneys to cover any potential liabilities or indemnification claims that may arise after the transaction. The buyer should negotiate an escrow or holdback arrangement to ensure that they have funds available to cover any losses or damages resulting from breaches of representations and warranties. The escrow or holdback provides the buyer with additional protection and peace of mind.
Purchase Insurance:
The buyer can also purchase insurance to protect themselves from potential liabilities or losses resulting from the transaction. The insurance can cover a wide range of risks, including breaches of representations and warranties, environmental liabilities, and litigation risks. Representations and Warranties insurance used to be much more expensive and unavailable to parties in smaller M&A transactions due to cost, but modern R&W insurance is more available and affordable.
The buyer should consult with an insurance broker to determine the appropriate coverage and cost of the insurance policy.
M&A transactions can be complex and risky for buyers. However, by taking the necessary precautions, the buyer can protect themselves from potential liabilities, mitigate risk, and ensure a successful transaction. It is essential to seek professional advice from legal and financial experts throughout the transaction process to minimize risks and maximize value.
If you’re exploring buying or selling a business, contact me to discuss your potential transaction.