Rep and warranty insurance, or representations and warranties insurance, is a way for the buyer or seller of a business to protect themselves from financial loss through the other party involved in the transaction not being entirely truthful.
Rep and warranty insurance is typically taken out by the buyer – during the process of selling the
business, the previous owner will provide a set of written statements that outline the state of the
company to the best of their knowledge. These representation and warranty statements are often an important part of the decision-making process for the new owner and can sway both the overall decision and the ultimate price.
Later on, if those statements are found to be demonstrably false, then the rep and warranty insurance can be used to recoup any perceived loss.
In situations where the seller may take out this type of insurance, they do so typically because they need cover for all or part of the payment for the company – for example, if there is a company share component to the compensation package, then they would want insurance against the statements made about the company that they will now have shares in.
Why is Rep and Warranty Insurance important?
It is not always a deliberate act on the behalf of the seller – so even if you trust them implicitly, it is still worth looking into insurance. Missed statements and misunderstood or forgotten liabilities can have an impact on the buyer’s financial situation, and having coverage means that you can recoup some or all of that money.
Do you need rep and warranty insurance?
Not strictly speaking – there is no legal requirement to take out this type of insurance coverage. However, it can be a very effective way of negating the risks associated with taking over a business, and so it is recommended in a lot of mergers and acquisition activities. If the seller is remaining with the organization post-sale, then rep and warranty insurance can take any emotion (and potential acrimony) out of misunderstood rep and warranty statements, and help to keep the relationship on friendly terms.
For further information on rep and warranty insurance or any other aspect of the M&A process, get in touch with Pinnacle Pharmacy Group. Our team has been handling transaction activity in the digital health, pharmacy, and Health businesses(and only those sectors) for many years and has all the skills, knowledge, and experience to help you.