Understanding Your M&A Risk Exposure

Since 2017,  business owners have participated in an annual average of nearly 50,000 M&A transactions, worth over $3.6 trillion per year. 

Whether buying or selling, both parties should also be aware of the risks associated with mergers and acquisitions transactions. 

Read on to learn more about these risks and strategies you can use to mitigate them.

Intellectual Property Risk in Mergers & Acquisitions

Intangible assets have significantly increased in value over the past few decades. In fact, intangible assets accounted for only 17% of S&P 500’s total assets in 1975 but are now 90%. 

However, many companies do not properly cover the value of intangible assets. According to a survey conducted by the Ponemon Institute, only 16% of businesses had insurance for the potential loss of information assets. 

What are Intellectual Property Rights in M&A?

Intellectual property (IP) is defined as a category of nonphysical assets. IP is protected by law from unauthorized use. Examples of legal protection for IP include:

• Patents
• Trademarks
• Licenses
• Copyrights

What Are Examples of IP Rights in an M&A?

Intangible assets can include but are not limited to:

• Trade secrets  
• Unpublished patent applications
• Software
• Software as a Service (SaaS)
• Product formulas
• Processes
• Business concepts
• Company brand names
• Logos
• Domain names
• And more

Strategies for Mitigating Intellectual Property Risk in M&A

Proactive IP management in M&A transactions can protect both parties from potential liability and risk.  

Hire a Professional

As intangible assets grow in value, they come with their own set of challenges: IP can be difficult to recognize, quantity, value and protect. That’s why we suggest enlisting professional help to ensure you’re properly protecting all of your intellectual property. 

Invest in Intellectual Property Liability Insurance

IP liability insurance can protect both investors and companies if they’re sued for infringement by another company. Most commonly, IP liability insurance helps to cover legal fees and damages if you’re found guilty of IP infringement. 

For more information, review our commercial insurance policies (including intellectual property liability) here. 

Breach of Representations and Warranties Risk in M&A

In each M&A transaction, both parties face the risk of unknown liabilities. Reps and Warranties is a term which describes “the assertions that a buyer and/or seller makes in a purchase and sale agreement.”

What Are Common Breaches of Representations and Warranties?

Let’s review some examples. In due diligence, the seller might hide or not communicate: 

• The accurate financial state of the company
• Past litigations
• Tax liabilities
• Pending or potential litigations
• The seller’s authority to sell the business
• Issues with employees

How to Mitigate Representations and Warranties Risk in M&A

If promises made in reps and warranties aren’t met following a sale, sellers may be required to pay up. Both buyers and sellers should consider insuring their company to protect themselves against reps and warranties risk during M&A transactions.

Purchase Representations and Warranties Insurance

Representations and warranties insurance is a policy corporations purchase for corporate transactions. Reps and warranties insurance helps to protect against losses arising due to the seller’s breach of its representations in the acquisition agreement. 

Policies can be both “buyer side’” and “seller side” and can provide benefits for both. 

To learn more about reps and warranties insurance, check out our executive protection policies, here. 

Tax Risks in M&A

According to Financier Worldwide,  M&A transaction parties frequently encounter tax risks associated with “whether a distribution is considered debt or equity, the classification of income as ordinary or capital, whether there are indirect transfer tax implications, and the impact, if any, of Section 382 limiting NOLs and Section 409A.”

Protect Your Company with Tax Insurance

While reps and warranties insurance covers the unknown information, tax insurance protects against the unknown tax position of a company. Tax risks can quickly snowball into a much bigger issue following an M&A transaction. 

Cybersecurity Risks in M&A

When undergoing mergers & acquisitions transactions, both parties should consider cyber risks. Cyber risks include losses surrounding the costs and liabilities suffered following a cybersecurity breach or leak. 

A recent survey found that 53% of executives stated that a critical cybersecurity issue had put an M&A transaction at risk. 

Invest in Cybersecurity Insurance

Cyber insurance is a must for anyone depending on a digital infrastructure to ruin their business. These coverage policies help to protect businesses against the financial devastation associated with a cyber attack. 

Find more information about cyber errors & omissions insurance, here.

Undergoing a Mergers & Acquisitions Transaction?

Consider protecting your company against these risks with Apex. You run a business with complexity, we provide custom solutions to meet your insurance needs.

Your business changes regularly, and so should your understanding of your insurance coverage. 

Learn more about who we work with here or contact us for more information on how we can protect your business against the risks of an M&A transaction.