Representations and warranties insurance (RWI) provides financial protection against losses resulting from breaches of representations and warranties made by the seller in an M&A agreement. In today’s middle-market M&A environment, managing post-closing risks and optimizing deal structures are crucial for both parties. RWI plays a key role in addressing these needs, particularly in middle-market transactions where it has become an increasingly prevalent tool. By eliminating the need for large escrows and minimizing claims against sellers who remain involved in management, RWI helps streamline deals and enhance their attractiveness. It also eases negotiations during the letter of intent (LOI) stage, making it easier for both sides to agree on key terms.
Although RWI can come with higher costs — such as premiums, legal expenses and more extensive due diligence — its benefits in flexibility and risk mitigation often justify these additional costs. For buyers in these transactions, RWI strengthens their bargaining position by reducing the need for sizable escrows and limiting the seller’s post-closing indemnity obligations. Moreover, RWI typically offers broader coverage, with higher limits and longer protection, compared to what sellers would normally agree to in traditional M&A deals.
Sellers, on the other hand, benefit from reduced post-closing liability, typically only covering a small portion of the deductible or fraud-related claims. For M&A advisers, RWI is a powerful tool to accelerate deal closures and simplify negotiations, making transactions in the middle market more appealing to both sides.
The outlook for RWI in middle-market M&A transactions remains strong, driven by low insurance rates and ample market capacity. The entry of new insurers and competitive pricing have kept initial costs low for buyers, further enhancing its appeal in the middle market. However, as deal activity continues to grow, insurance premiums and upfront costs for buyers may rise. While buyers typically bear the cost of RWI, this expense is often factored into the overall pricing of the deal. Given current market conditions, RWI continues to be an effective tool for managing post-closing risks in middle-market M&A, though future market adjustments may impact its cost and availability.
M&A Market Activity
In November 2024, U.S. deal volume experienced a decline, down 6.9 percent compared to November 2023. Despite the slight decrease, M&A activity is set to increase, driven by stable financing, reduced recession risks and stronger strategic needs. Federal Reserve rate cuts will lower capital costs, boost confidence and support the M&A market by making investments more attractive.
The Columbus M&A market experienced a 16.6 percent increase in activity in November 2024 compared to the same period in 2023. Moreover, there were several noteworthy transactions completed by both strategic acquirers and divestors, highlighting the region’s vibrant and bustling deal-making activity. Installed Building Products, America’s Floor Source, and Irth Solutions all completed strategic acquisitions, while companies like Commercial Vehicle Group achieved successful divestitures during this period.
Deal of the Month
Contract Lumber Inc. is an Ohio-based full-service lumber yard and subcontractor, offering solutions such as competitive material pricing, engineering services, and complete turnkey services. On November 27, 2024, Contract Lumber announced the acquisition of Cedar Supply Inc., a Texas-based family-owned company. By merging Cedar Supply’s established operations with its existing customer base, the company aims to enhance its service offerings and capabilities. Cedar Supply has built a strong reputation for integrity and excellence, and its expertise will be a valuable addition to the broader operations.
Domenick Cristino is a Vice President with MelCap Partners, LLC, a middle-market investment banking advisory firm. For more information on MelCap Partners, please visit www.melcap.com or email [email protected].
