liabilities like warranty claims (stock purchase)

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by a searcher from Claremont McKenna College
in San Francisco Bay Area, CA, USA

5yrs ago

liabilities like warranty claims (stock purchase)

working on the potential acquisition of a leading RV dealership with almost $2 M EBITDA (have a growth plan, with my background in rental software)

doing it as a stock purchase (not asset purchase) in order to preserve the licenses, contracts and the floor plan line. but, that means managing the liabilities:

besides indemnification, how could one limit the exposure to liabilities like warranty claims? take historical warranty claim costs and set up a seller-funded account (escrow?) to manage any future overage?

thanks for any thoughts! best, Andy

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reply by an intermediary 5yrs ago
from Wake Forest University in Winston-Salem, NC, USA

We just recently did something very similar -- there is a baseline of normal warranty work built into the financials, and thus already reflected in the valuation. The buyer's concern is if there is something extraordinary -- we set up an escrow holdback for warranty expense that exceeded the normal 12 month warranty period. For product liability, a different animal, in a stock sale your insurance should stay intact and be a primary source for covered items. If you are ending a claims-made policy, you should explore tail insurance.

reply by a searcher 5yrs ago
from Claremont McKenna College in San Francisco Bay Area, CA, USA

Thanks very much for these posts! I like the idea of having a specific indemnification for warranty claims and using a working capital adjustment. I hadn't thought about tail insurance, thanks.