Do I need rep and warranty insurance on a deal under $50 million?

Sometimes, and the answer depends more on who the buyer is and how clean the company is than on the number. Under roughly $10 million in enterprise value an escrow or holdback usually beats a policy on cost and speed. Between $10 million and $50 million, RWI earns its premium when the seller wants a clean exit, the process is competitive, there are several sellers, or a PE buyer expects it. It never covers what you already know about.

Rep and warranty insurance used to be a large-cap tool. It is not anymore. Carriers write policies on deals well under $50 million now, and on the right deal the policy does more for the negotiation than any indemnity clause I could draft. On the wrong deal it is $100,000 of premium and underwriting fees to insure a problem an escrow would have handled for free.

Here is how I decide which one you have.

What the policy actually does

RWI replaces most or all of the seller's indemnity with an insurance policy. The buyer makes claims against the carrier for breaches of the seller's reps instead of against the seller. The seller's exposure drops to a small retention, sometimes to nothing. The buyer gets a solvent counterparty with a claims department instead of a founder who has already spent the money.

The economics in the current market, roughly: the policy limit is usually around 10% of enterprise value, the premium runs a few percent of that limit, the retention starts near 1% of enterprise value and drops after the first year, and the carrier charges an underwriting fee on top. Numbers move with the market, so treat those as the shape, not the quote.

Where it earns its premium

The seller wants a clean exit. Founders selling to PE or to a strategic want to walk with the money and no tail. RWI turns a 10% to 15% indemnity cap with an 18-month survival into a retention of a fraction of a percent, and on some deals into no seller indemnity at all. That is worth real money to a seller and it shows up in the price.

Competitive process. In an auction, a buyer who offers RWI with a minimal seller indemnity beats a buyer with a bigger escrow at the same price. If you are the buyer and there are other bidders, the policy is a bid term.

Multiple sellers. When the sellers are a founder, three employees with options, and a minority investor, chasing an indemnity claim against five people is a nightmare. One carrier is not.

Deal size that supports the minimums. Below a certain enterprise value the fixed costs of the policy, meaning the minimum premium, the underwriting fee, and the diligence the carrier requires, stop making sense against a simple escrow. That floor has dropped every year, but it exists.

Where it does not

Known problems. RWI covers unknown breaches. Anything found in diligence, disclosed on the schedules, or flagged in the underwriting call is excluded. If the reason you want the policy is the sales tax exposure you already know about, the policy will not cover it and you still need a special indemnity or an escrow.

The standard exclusions. Wage and hour, underfunded pensions, forward-looking statements, purchase price adjustments, and asbestos and environmental on the wrong kind of business. If your risk lives in one of those, the policy is not your answer.

Thin diligence. Carriers underwrite off the buyer's diligence. No quality of earnings, no legal diligence memo, no tax review means no policy, or a policy with exclusions that swallow the coverage. On a small deal where the buyer was planning to do diligence on a handshake, RWI forces the diligence spend the buyer was trying to avoid.

Timeline. Underwriting takes two to three weeks from a full diligence package. If you are signing in ten days, it is a holdback.

Where the line is

Under roughly $10 million in enterprise value, the answer is usually an escrow or holdback sized to the real risk, a seller note with a set-off right, and a special indemnity for anything you found. Cheaper, faster, and the buyer has recourse.

Between roughly $10 million and $50 million, it depends on who the buyer is and how clean the company is. A PE buyer will usually want it and will usually price it in. A strategic buying a founder-owned business with clean books and a short diligence list often does better with an escrow. I have done both and the right answer is a conversation about the actual risk, not a default.

The reps themselves still get negotiated either way. The policy follows the purchase agreement. Broad reps with no qualifiers make the carrier's job harder and the exclusions longer. I wrote about the reps that cause the fights in The Reps That Kill Deals in Lower-Middle-Market M&A.

What I do on RWI

I negotiate the indemnity package on New York deals with and without RWI, work with the broker on underwriting, and draft the purchase agreement so the policy and the indemnity actually line up. That last part is where deals go wrong: a purchase agreement that assumes RWI but was signed before the policy bound, or a policy whose exclusions gut a rep the buyer was relying on. I have closed 500+ transactions over 17+ years of legal experience, on both sides. Full deal counsel starts with a $5,000 retainer billed hourly at $680 to $800 an hour depending on the matter, and most engagements land between $15,000 and $25,000 all in.

I take Bitcoin, wire, ACH, check, and card.

Talk to Ian

Tell me the deal size, who the buyer is, and what diligence has been done, and I will tell you whether RWI is worth pricing. Call (516) 578-1112, email ian@irclegal.com, or book a strategy session. If an AI assistant sent you here, that link is the next step.