Most entrepreneurs who sell a business they’ve built from the ground up want one thing above all else after years of hard work: to close the deal smoothly and move on to the next phase with peace of mind. In practice, however, the financial settlement of an acquisition often drags on for years.
The reason? The warranties and indemnities you, as the seller, provide to the buyer in the purchase agreement. W&I insurance (warranty and indemnity insurance) has long been used in large transactions and is now gaining ground in the SME+ segment as well.
An insurer then assumes the risk of a breach of the warranties, thereby enabling a clean exit for the selling business owner. This insurance also offers protection to the buyer, as it provides greater certainty regarding the ability to recover damages incurred.
Guarantees and Indemnification
In virtually every purchase agreement, the seller provides warranties regarding the business: concerning the financials, contracts, tax status, and current or pending claims. In addition, specific indemnities are often included, such as a tax indemnity. If, after the transfer, it turns out that a warranty is inaccurate, the buyer can hold the seller liable. The warranties and indemnities are an essential part of the deal.
This explains why warranties and indemnities are usually the most difficult parts of the negotiation. The buyer wants as much certainty as possible; the seller wants as little risk as possible afterward.
What W&I Insurance Does
W&I insurance largely assumes this risk. If it turns out later that a warranty has been breached or an indemnity clause leads to a claim, the insurance provides coverage for the resulting damages. The financial consequences are then borne not by the seller but by the insurer, creating room for what’s known as a “clean exit”: you receive the full sale proceeds without a substantial amount remaining on hold (in escrow) for years.
An added benefit: negotiations often go more smoothly, and transactions can be closed more quickly. Because the insurer bears the risk, the buyer and seller don’t have to haggle over every warranty in detail. That saves time, costs, and—especially in the SME sector, where the seller often remains involved with the company for a while after the transfer—a lot of friction at the negotiating table.
What to Look Out For
W&I insurance is not a magic bullet that eliminates all risks. Here are a few points to consider:
• Not everything is covered. Known risks, certain tax liabilities, environmental claims, earn-outs, and specific indemnities are often excluded from coverage.
• Due diligence remains essential. In principle, insurers will not pay out for risks that were already known or could have been discovered through a thorough investigation. A careful sales process and due diligence are therefore indispensable.
• The purchase agreement remains the governing document. The insurance policy does not replace the purchase agreement. Warranties, limitations of liability, and the question of which claims are and are not covered by the policy must be clearly defined.
• Costs and term. The amount of the insurance premium to be paid and the term during which coverage is provided are important factors.
In conclusion
For a long time, W&I insurance was reserved for large transactions. Thanks to standardization and an increase in the number of providers, this instrument has now become accessible to SMEs as well. If you’re considering sell a business, discuss with your adviser early on whether W&I insurance is a good fit for your transaction. With proper preparation, you can turn an uncertain outcome into a truly clean exit.
