With Q1 of 2024 showing some (and whisper it quietly…) positive indicators of a gradual upturn in M&A for the year, it also gives us a chance to reflect on the many themes and trends of the last 12 months. One theme that we have noticed in particular, but which we do not often see discussed, is a resurgence in the number of requests for a sell-side policy.
At Optio we view sell-side policies as a perfectly viable, standalone option for Sellers when going through an M&A transaction. A process that demands sophistication, commercial underwriting and, most importantly from a Seller insured’s perspective, bespoke coverage.
Often however, sell-side policies can be thought of merely as last-minute solutions for transactions where Buyers have not seen it fit to obtain W&I. The reasons for this can vary but an unfortunate byproduct of this eleventh-hour approach can often lead to broad-brush solutions and significant gaps in coverage.
In fact, on our most recently bound sell-side transaction the Sellers were met with similar problems. The transaction itself was off-market and the Buyer was simply not familiar with the product. Whilst the Sellers and their advisers proposed its inclusion at initial heads of terms stage, the Buyer had no appetite and the discussions went no further. Fortunately, the early engagement by the Sellers meant that they had time to fully engage in a sell-side underwriting process, leaving ample opportunity for policy negotiation. Sellers should not be, and do not have to be, restricted by a Buyer’s appetite towards W&I.
At Optio, our Transactions Liability team specialises in the provision of W&I insurance for SME transactions (with EVs up to GBP 120m (or currency equivalent)) and we have a proven track record for innovation and first-class service levels across both buy-side and sell-side underwriting processes.
Our approach to sell-side underwriting is what we would consider traditional, yet flexible, insofar as we do not require the provision of Vendor Due Diligence Reports*. Whilst they are of course helpful, we can underwrite a transaction using only access to the virtual transaction data room and the buy-side due diligence questionnaire. From here we will identify the key issues in the transaction and business and assess whether a Buyer has appropriately scoped the transaction due diligence.
The sell-side policy typically will sitback-to-back with the SPA in respect of any financial and time limitations and, from a process perspective, we require the following:
(1) the data room must be generally disclosed, and
(2) the Seller must keep the existence of W&I confidential.
As SME specialists, we are innovative in our approach to underwriting and typically look to complete a sell-side underwrite in 5 days. We are also aware of transaction timeline pressures and can (and have) expedited processes when required. We also do not require an underwriting call which we find can help with transaction time pressures.
The protection afforded to Seller insureds under a sell-side policy may be an underutilised resource in the current M&A market, and that does not need to be the case. It should be viewed as more than an afterthought.
Should you wish to discuss a sell-side underwrite, please contact a member of the Optio Transactional Liability team or your usual transactional liability broker.
*Vendor Due Diligence Reports = due diligence reports (often legal, financial and tax) prepared by Sellers and given to prospective Buyers on a reliance basis (which typically form a material part of a Buyer’s due diligence process).