Representations & Warranty Insurance (RWI) in M&A TLDR

Representations & Warranty Insurance (“RWI”) is used in mergers and acquisitions(M&A) to protect against losses arising due to the seller’s breach of certain representations and warranties in an acquisition agreement. Although available for both buyers and sellers in a transaction, the vast majority of RWI policies are buyer-side policies, compensating the buyer for breaches by the seller. The policy term is generally three years for general representations and six years for fundamental and tax representations.

Policy Structure

Limit
Typically, 10% of enterprise value of the target

Retention
Typically, 1% of enterprise value, dropping to 0.5% of enterprise value after the general rep survival period in the purchase agreement (minimum retentions are $250K -$350K)

Cost
3% -4.2% of policy limit

Taxes
Appliable state surplus lines taxes apply, based on the location of the Named Insured

Fees
Reach out redacted of RWI
- Risk transfer provides peace of mind to Buyer
- Makes the bid for a company more attractive to a seller
- The indemnity / policy term provided under RWI coverage is longer than the indemnity period in a standard purchase agreement
- Allows seller to “walk-away” from a transaction by either reducing or eliminating the amount of sale proceeds required to be held in escrow

What is the estimated purchase price for the company? Most RWI insurers charge minimum premiums that typically apply to $5M of coverage purchased. The amount of coverage purchased is typically 10% of the transaction size (so the minimum transaction size is generally ~$50M). RWI might be available for deals in the $30-50M range (still using $5M limit) but should be discussed with the RWI team at the outset.

Representation and Warranties Insurance (RWI) has seen significant growth in recent years, but not every transaction is a perfect fit for this type of coverage. Factors such as your role in the transaction, the transaction size, its structure, and the due diligence being performed are all important considerations. To help determine whether RWI might be appropriate for your transaction, consider the following questions:

1. What is your role in the transaction? Are you the buyer or seller? Are you a private equity sponsor or a strategic company? The majority of RWI policies are placed on the buyer’s side, meaning that if you are the buyer, you are more likely to benefit from RWI coverage.

2. What is the estimated purchase price of the company? Most RWI insurers have minimum premiums that apply to $5 million in coverage, with coverage typically set at 10% of the transaction size. As such, a typical transaction size for RWI coverage starts at around $50 million. However, for deals in the $30-$50 million range, RWI might still be available, though it is important to discuss these specifics with our team early on.

3. What is the structure of your transaction, and how much of the target will you be acquiring? RWI is most often used in buyout/control M&A transactions, where you are acquiring a majority stake. In the case of minority equity investments, insurers still expect thorough due diligence similar to that in buyout transactions, but any losses covered by RWI will be prorated based on your equity ownership percentage.

4. What third-party advisors have you engaged, and what due diligence reports are being prepared? Thorough due diligence, documented in third-party reports from advisors such as legal, financial, tax, cyber, or environmental experts, is essential for successful RWI placement. Insurers require that for each representation in the purchase agreement, you can reference specific diligence performed to validate the accuracy of the representation.

5. What is the nature of the company’s operations? While most industries can be insured through RWI, certain sectors, such as insurance/reinsurance, financial service broker-dealers, and the cannabis industry, may face challenges finding willing insurers.

6. What is the estimated timing of your transaction? The RWI process typically takes at least two weeks from start to finish, so it’s important to factor this into your timeline. Keep in mind, this timing is often tied to the signing of the deal rather than the closing.

7. Does the target company have international operations? If the company you’re acquiring has significant international operations, RWI usually requires local counsel diligence for these operations. In assessing materiality, consider not only the revenue associated with international activities but also the number of employees involved abroad.

8. Have you used Representations and Warranties Insurance before? If this is your first time utilizing RWI, it’s important to engage with us as early as possible. First-time RWI users often need additional guidance throughout the process.

For more information or to discuss whether RWI is right for your transaction, feel free to contact us. We are here to guide you through the process and ensure your transaction is appropriately covered. redacted