M&A insurance as an instrument in the acquisition of companies in german practice

M&A-insurances are also increasingly used in the german market to help company sales in the medium-sized sector to be successful.

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Initial situation in german practice

In addition to the purchase price, the guarantees to be provided by the seller are regularly a major issue in the acquisition of a company in Germany. The extent and scope of these guarantees provide numerous grounds for dispute during negotiations on the sale of a company and can often torpedo the entire transaction process.

Particularly when, for example, a german medium-sized entrepreneur intends to sell to external financial investors, such as private equity funds, due to the lack of successors within the family, irreconcilable conflicts of interest often clash on the issue of liability. While the selling entrepreneur as a private individual does not want to assume any personal liability after the sale, the financial professionals on the buyer's side must work toward extensive protection through guarantees - if only in consideration of the investors behind them, to whom they are accountable in this respect.

In order to bridge these conflicting interests and make the sale of the company possible, the instrument of M&A insurance can be a solution in german practice.

Which risks are insured in Germany?

Typical objects of such M&A insurances in german practice are, for example:

  1. Legal guarantees, such as the unrestricted right to dispose of company shares or assets,
  2. Tax guarantees,
  3. Environmental guarantees,
  4. Continuance of employment contracts.

In Germany, it is possible to insure unknown risks, which were not discovered after due diligence, as well as known risks, which were evaluated by the insurance company on the basis of a concrete risk assessment.

How does M&A insurance work under german law?

As a rule, the buyer insures itself as policyholder against a breach of warranty promises by the seller. Particularly in the U.S., potential corporate buyers are not infrequently expected to offer such insurance in the data room. The costs of such M&A insurance are usually shared between the buyer and the seller.

However, it is also possible for the seller to insure itself internally against a claim by the buyer in Germany. This may be desirable for negotiation reasons, for example, if the seller does not want to document to the outside world that he does not want to be personally liable (in full) for the guarantees given.

What does M&A insurance cost in Germany?

Currently, M&A insurance for european transactions costs between 1.15 and 2% of the purchase price. For a company value of 20 EUR million, this would mean about 250,000 EUR, which is regularly shared by the buyer and seller.

Conclusion

Especially when the issue of liability threatens to derail the purchase of a company, M&A insurance can be the solution in german practice. Especially for a medium-sized entrepreneur who plans an external company succession, but privately does not want to bear unmanageable liability risks after the exit from the company, this is an interesting structuring instrument.

The rather manageable costs compared to the purchase price, which he will regularly share with the buyer, can be worthwhile if one can sleep soundly in return.

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