In business acquisitions, we are seeing an increasing popularity of S&I insurance. This is no surprise, given the growing complexity of transactions and the need for both buyers and sellers to obtain additional security.
Increasingly, S&I insurance is part of negotiations between buyers and sellers. But what does this mean for you as a seller? And how can this insurance strengthen your position?
What is S&I insurance?
S&I insurance, or Warranty & Indemnity insurance, covers risks arising from hidden defects or inaccuracies in the warranties and representations issued in an acquisition. For you as the seller, this means you can limit your liability and make the deal more attractive to the buyer.
For the buyer, S&I insurance provides protection against financial losses arising from claims that arise after the acquisition, such as tax claims or legal disputes. Moreover, the buyer is no longer dependent on the seller, but can turn to the S&I insurer with her potential claims.
Benefits for the seller
- Shift liability: with S&I insurance, you shift the liability and risk of any claims from yourself to the S&I insurer, paying the premium (and fees). This means you won't face unexpected claims after the sale, making the deal much more attractive.
- Improved negotiating position: by offering S&I insurance, you show that you are willing to share risk, which can improve your negotiating position and increase the likelihood of a successful deal.
- More attractive to buyers: it provides additional security to the buyer, which can be especially important in complex acquisitions or higher-risk transactions.
Disadvantages and considerations
- Costs: S&I insurance comes with costs, such as premiums and administrative fees. It is important to factor these costs into your considerations. Often the costs can be reasonably well estimated in advance.
- Exclusions and limitations: not all risks are covered by S&I insurance. Insurers often use standard exclusions that may require additional insurance. This can affect the terms of the policy and residual liability.
- Complexity of claims: filing claims can sometimes be complex and can lead to disputes between the insured party and the insurer.
When is S&I insurance useful?
Previously, S&I insurance was often only considered for large deals (EUR 50 million and above). In practice, we see that the S&I market is changing. S&I insurance can also be valuable for lower value transactions and the premiums can be attractive. As a seller, if you don't want to face any claims in the future after the deal, taking out S&I insurance can be helpful. You then pay a certain premium (and additional costs) when you sell a business, but you have the advantage of not having to face claims in the future. In particular, as a seller, it may be nice to shift the risk to a W&I insurer if you remain involved in the business after the acquisition. For example, because you are reinvesting in part or if you will continue to be involved as a director for some time. You then want to avoid having to discuss claims from the acquisition with the buying party, with whom you continue to work after the acquisition.
Conclusion
S&I insurance can provide significant benefits in business acquisitions by reducing risk, facilitating negotiations and providing additional peace of mind. For you as a seller, it is important to carefully consider the costs and limitations of insurance. By using S&I insurance strategically, you can strengthen your position and contribute to a smoother transaction. As an acquisition advisor, it is crucial to be well informed about the options and benefits of S&I insurance. This can help you make the most of each deal and optimize your role in the acquisition process.
