If you’re a business owner preparing to sell—or considering buying—a business, there’s one tool you may not be familiar with but should be: M&A insurance.
Mergers and acquisitions (M&A) insurance is a strategic solution that helps protect both buyers and sellers from costly, unexpected surprises after a deal closes. Whether it’s a tax issue or an overlooked detail in the sale agreement, this type of insurance can help minimize risk and smooth the path forward.
In this blog, Paul Skeith, founding partner of Richards Rodriguez & Skeith, breaks down what small business owners should know about M&A insurance and how it can be a game-changer in deal negotiations.
Types of M&A Insurance
M&A insurance typically comes in two forms:
Tax Liability Insurance
This coverage protects against tax consequences that differ from what both parties expected. For example, imagine both the buyer and seller believe the business qualifies as an S corporation based on their due diligence, but the IRS later disagrees. Tax insurance would help cover the unexpected tax costs resulting from such misclassification.
Representations and Warranties (R&W) Insurance
This is the more commonly discussed type of M&A insurance. It protects against unintended inaccuracies in the seller’s representations—the legally binding promises made about the business in the sale agreement. These may involve financial statements, pending litigation, environmental concerns, or other material risks discovered after closing.
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What Does M&A Insurance Actually Cover?
M&A insurance is designed to cover only honest mistakes, not known or disclosed issues. If the seller or buyer is aware of a specific problem before the closing, it must be handled separately through deal negotiations.
For all the unknowns, however, this insurance can provide a safety net, allowing both parties to move forward with greater confidence.
Why It Matters in Negotiations
One of the most contentious parts of any deal is the holdback—the portion of the purchase price that the buyer withholds to cover potential post-closing issues. M&A insurance can eliminate or reduce that holdback, making the terms more attractive for the seller while giving the buyer peace of mind.
This shift also removes a significant sticking point in negotiations and often speeds up the transaction timeline.
Without M&A insurance, any post-closing problem usually means the buyer goes back to the seller and demands a fix, often leading to legal disputes or strained relationships.
With M&A insurance in place, the buyer typically turns to the insurer, not the seller, when issues arise. That aligns the interests of both parties, allowing them to work together to resolve issues and recover funds from the insurer—not from each other.
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Is M&A Insurance Right for You?
For business owners considering a sale, especially in the small to mid-sized range, M&A insurance offers a smart way to:
- Protect your financial interests
- Close faster and with fewer headaches
- Reduce the risk of future disputes
- Walk away with more cash at closing
M&A insurance isn’t just for large corporate transactions anymore. With more insurers offering accessible options tailored to smaller businesses, this tool is worth discussing with your legal and financial advisors as part of your exit strategy.
If you have questions about how M&A insurance could affect your business sale and how to navigate contract terms, consider contacting Richards Rodriguez & Skeith. Our business and transactional services ensure you are making strategic decisions for your Texas business.
