M&A Minute: What’s the Minimum Deal Size for RWI?
March 13, 2023
Clients and potential clients often ask me, “What is the smallest deal you can work with?” I explain that representations and warranties (R&W) insurance usually doesn’t have to do with the deal size; it has everything to do with the limit size.
So, the answer to that frequent question varies greatly, depending on the nature of the transaction. For example, you can buy a $5 million limit for a $100 million deal or for a $5 million deal.
The real question is, how useful is reps and warranties insurance in your particular deal? Do you need at least $3 million to $5 million of coverage? If you don’t need that much coverage, R&W may not make sense.
Determining Reps & Warranties Insurance Limits
Reps and warranties insurance serves as an alternative to an escrow requirement that can enhance the deal terms for a buyer and seller.
This form of insurance transfers indemnification risk away from the buyer and seller to the insurance company, reducing any friction between the two parties during negotiation and increasing the chances that a deal will go through.
However, R&W is not a one-size-fits-all tool.
The average limit of reps and warranties insurance is about 10% of the overall transaction size. That means that a $10 million limit would be the average in a $100 million deal. However, there are other critical factors to consider:
- The nature of the deal. The choice of a limit is often determined by what the buyer considers as an ideal escrow amount.
- The size of the deal. If a transaction is over $750 million, it’s possible that the insured amount may be less than 10%. In large transactions, even 5% represents a large enough dollar amount to be significant.
- Your organization’s existing insurance coverage. An experienced broker will examine how R&W coverage relates to the other insurance policies your company already has in place and what additional coverage may be needed in your situation.
How Much Reps & Warranties Insurance Does Your Organization Need?
To recap, let’s return to the frequent question we get regarding the smallest deal needed for reps and warranties insurance. The answer does not depend on the size of the deal, but on how valuable and useful R&W is in each situation.
|In general, if you don’t need $3 million to $5 million in coverage, you may not need reps and warranties insurance. While you can get a lower limit, you are likely to face minimum premiums and end up overpaying in the long run.|
The commercial insurance market has experienced price fluctuations in recent years. It’s essential to work with a broker who keeps up to date with current pricing and trends in the entire industry, not just in R&W.
Our dedicated team at Woodruff Sawyer understands the complexities of reps and warranties insurance and all the insurance lines that come into play with mergers and acquisitions transactions. We have the experience, knowledge, and resources to review all your insurance needs and present the solution that works for your specific deal.
M&A Minute: What’s our Minimum Deal Size
Related Blog Posts
Minority Investments and RWI: Choosing the Right Policy
Minority investment deals are becoming more common among our strategic company and private equity clients. The reps and warranties policy for these deals is different.
M&A Minute: When R&W Insurance Works to Cover Interim Breaches
Reps and warranties insurance protects against breach of contract for M&A transactions. Learn the two scenarios during the sale of a company when reps and warranties insurance are at play.