Transactional Risk

As a business, risk preparation is always key. However, even with optimal planning, there’s always potential for disruption due to unforeseen financial exposures or disagreement between parties on risk allocation. Taking steps to minimise disruptive risk is critical to the success of a transaction, particularly when it comes to completing sensitive mergers and acquisitions.

Strategic buyers, private equity firms, and other deal participants, especially across borders, need to keep transactional risk top of mind when engaging in a transaction. Common instances of transactional risks that can impact M&A activities include:

• Warranty breaches: Potential breaches of seller warranties materially affecting a buyer’s valuation of a business. 
• Post deal liabilities: Risk of sellers retaining post deal contingent liabilities and preventing the full repatriation and/or re-allocation of sale proceeds.
• Cross border deals: Investing into a foreign jurisdiction can create significant uncertainty for a buyer with respect to a target business.
• Impact of key relationships: Friction between a buyer and management sellers who are involved in the business post transaction in the event of a claim for loss.
• Specific known risks: Specific risks associated with the target business such as potential tax liabilities can cause material financial exposure and create hurdles in deal negotiation between parties.

Strong due diligence, coupled with insurance designed specifically for transactional risk, can help facilitate your deal and safeguard you against financial loss.

Transactional risk insurance provides coverage for strategic buyers, private equity firms, and other deal participants involved in mergers and acquisitions. It typically includes representation and warranties insurance or warranty and indemnity insurance, tax liability insurance, contingent legal risk insurance, and environmental liability insurance.

Insurance coverage for transactional risk allows parties in a merger or acquisition to transfer many of their risks to an insurance provider and away from their balance sheet. This allows companies to allocate them away from the transaction itself and eliminates the need for special indemnities or purchase price reductions.

Tax insurance is an example of a customised solution which can cover known tax issues associated with an M&A transaction and insure specific tax treatments which may be uncertain.

Transactional risk often equates to risk of financial loss for either buyer or seller. We help companies determine what kind of risks involved in an M&A transaction can be transferred to the insurance market as a means of mitigating such financial exposure.

Assessing deal risks early on in an M&A process makes it easier to measure their potential impact when a transaction is in the works. This should go hand-in-hand with proper due diligence and an appropriate insurance program.