The Biggest Impact of TLPE

Transactions are major decisions in the life of a business, for both Sellers and Buyers.

In a standard transaction a Buyer will request money from the purchase price be held in escrow. And, while I’ll admit there is a strong argument justifying those types of requests, there are also viable alternatives.

First, why do Buyers want those holdbacks?

Often there’s not enough data or information available for the parties in a deal to reach an adequate level of certainty when it comes to risk, so Buyers use escrows/holdbacks as a hedge. This way the Buyer has cash to immediately respond to a breach, if one occurs.

The amount held back is usually 10% of purchase price. This may be reasonable to the Buyer, but it can be significant for Sellers of small companies looking for an exit.

In recent times, Representations & Warranty insurance has emerged as the most significant risk transfer solution in years. With this coverage, if there is a breach of the Seller reps, the Buyer is able to recover any losses without going after the Seller. The Buyer simply makes a claim with the insurer.

R&W coverage is ideal. Claims are paid. It works. And it has become increasingly popular in the M&A world.

There is a wrinkle: it’s not readily available for sub $20M EV deals.

But there is a solution:

Transaction Liability Private Enterprise insurance (TLPE).

Unlike traditional R&W insurance, TLPE is a Sell-Side policy where the Seller, rather than the Buyer, is the policyholder. The policy is designed to be triggered when the Buyer makes a claim against the Seller. Instead of going after the Seller directly, the Buyer simply collects from the insurer. Easy.

Think of TLPE as a simplified version of R&W coverage that can be placed in days rather than weeks and at a fraction of the cost.

Sellers benefit from this insurance as well, and we’ve seen the results first-hand. The lesson we’re learning after 10 months of small business placements is that TLPE is effectively reducing escrow levels in deals from 10% to 1% of purchase price. (TLPE is only 1% of EV or $10,000 whichever is higher.)
Some examples from recent deals include:

  • $1.4M apparel wholesaler had their escrow fall from $140,000 to $14,000.
  • $6M consumer product manufacturer had his escrow fall from $600,000 to $60,000.
  • $11M SaaS company’s escrow fell from $1.1M to $110,000.

I regularly hear from M&A professionals who observe how R&W coverage, including TLPE policies, removes a significant amount of stress in deals.

One big reason may be that Sellers are closing with significantly more money in their pockets at no cost to the Buyer. That’s a very nice goodwill gesture, to be sure.

Please contact me, Patrick Stroth, for more information at [email protected].