Top 3 risks in tech M&A deals

The technology sector is continuing to boom and acquisitions are becoming a norm. In 2021, technology M&A values exceeded $1 trillion for the first time, a 60% increase on the previous year. Between 2010-2019, the 5 big techs in the US – Google, Apple, Facebook, Amazon and Microsoft collectively made 616 acquisitions, 400 of which were SME tech companies.

For tech businesses, M&A risks are wide ranging and can differ greatly to those of traditional businesses. These risks are not necessarily in physical assets but are often intangible and in many cases unique.

Here are 3 top risks within tech M&A deals:
‍

Intellectual Property (IP):

‍IP is often the most fundamental and valuable asset which gives a tech company its purpose. An IP infringement action, for example by a competitor, can easily cripple a tech business. The tech sector is known for high growth and innovation. For this reason, in a sector with IP at the core of its value, litigation will be commonplace as businesses look to protect their most valuable assets and obtain competitive advantage. Representations and warranties are likely to include IP, so sellers could be liable for any problems that arise post-deal.
‍
‍Data Protection

‍Client data is a valued commodity in today’s world, and the protection of this data has been the focus of regulators around the globe. In Europe, General Data Protection Regulation (GDPR) outlines strict requirements on how data can be collected and used, and the penalties for breaching these rules are severe. Tech companies are often data custodians because their customers trust them with their data in large volumes, which raises their exposure to data protection regulation. In tech M&A transactions, data breach issues which surface after a deal can lead to hefty claims and lengthy litigation.
‍
‍Cyber security

‍Cyber threats have grown considerably in recent years. Google revealed that it blocks more than 18 million malware and phishing emails related to COVID-19 every day. Financial consequences have also become more severe, with cybercrime costing organizations $2.9M every minute. The implications of a cyber security breach within tech firms are probably greater than those in any other sector. This is in part related to data protection, as cyber-attacks can have flow-on effects on a tech company’s customer base which can result in litigation. In tech M&A, cyber security and risk exposure are analyzed in detail during the due diligence process.
‍

As tech M&A transactions continue to increase, claims are also on the rise. It is worth noting that E&O policies typically exclude patent litigation, so having fit-for-purpose insurance in place can help facilitate a smoother transaction and provide the seller with peace of mind.

AcquireCover's solution for business buyers and sellers is Transaction liability private enterprise (TLPE). TLPE is a first-to-market sell-side product developed by CFC, a Lloyds of London Syndicate which can provide comprehensive coverage for tech M&A transactions up to an enterprise value of $15M. TLPE covers the seller for any innocent breaches of warranties up to 7 years, as well as defence costs.

‍
For more information visit us at AcquireCover Insurance

More from Acquirecover

Title to Shares Insurance: Everything You Need to Know

July 24, 2023

# Title to Shares Insurance: Everything You Need to Know ## Introduction Title to shares insurance is a crucial component of mergers and acquisitions (M&A) transactions. It provides protection to buyers and sellers against potential risks and liabilities associated with the transfer of ownership of shares. In this article, we will address the top 10 most frequently asked questions about title to shares insurance and provide comprehensive answers to help you understand its importance and benefits. ## 1. What is title to shares insurance? Title to shares insurance, also known as share purchase insurance or share warranty insurance, is a type of insurance policy that protects buyers and sellers in M&A transactions. It covers the risks and liabilities associated with the ownership of shares, such as undisclosed liabilities, breaches of warranties and representations, and legal defects in the title. ## 2. Who typically purchases title to shares insurance? Both buyers and sellers can purchase title to shares insurance. Buyers often require sellers to obtain this insurance as a condition of the transaction to ensure that they are protected against any potential risks or liabilities. Sellers may also choose to purchase this insurance to enhance the marketability of their shares and provide additional protection to the buyer. ## 3. What risks does title to shares insurance cover? Title to shares insurance covers a wide range of risks and liabilities. Some common risks covered include: - Undisclosed liabilities: The insurance policy provides coverage for any undisclosed liabilities that may arise after the transaction, protecting the buyer from unexpected financial burdens. - Breaches of warranties and representations: If the seller breaches any warranties or representations made during the transaction, the insurance policy can cover the costs associated with any resulting claims or legal actions. - Legal defects in the title: In case there are any legal defects in the ownership of shares, such as missing or defective documentation, the insurance policy can provide coverage for the costs of resolving these issues. - Tax risks: Title to shares insurance can also cover potential tax risks associated with the transaction, ensuring that both parties are protected from any adverse tax consequences. ## 4. How does title to shares insurance work? Title to shares insurance works by providing financial protection to the insured parties in the event of a covered loss. The insurance policy is typically purchased before the completion of the transaction and remains in effect for a specified period, usually several years. If a covered loss occurs during this period, the insured party can make a claim to the insurance company, which will then provide compensation up to the policy limit. ## 5. What is the cost of title to shares insurance? The cost of title to shares insurance varies depending on various factors, including the size and complexity of the transaction, the level of risk involved, and the policy limit. Generally, the premium for title to shares insurance is a percentage of the insured amount, typically ranging from 1% to 3%. It is important to note that the cost of insurance should be considered as part of the overall transaction costs and negotiated between the parties involved. ## 6. How long does title to shares insurance coverage last? The duration of title to shares insurance coverage is typically negotiated between the parties involved in the transaction. It can range from a few years to as long as the parties deem necessary. The duration of coverage should be carefully considered based on the nature of the transaction and the potential risks involved. It is common for the coverage period to align with the statute of limitations for potential claims. ## 7. Can title to shares insurance be customized to specific needs? Yes, title to shares insurance can be customized to meet the specific needs of the parties involved in the transaction. The policy can be tailored to cover specific risks and liabilities identified during the due diligence process. The coverage limit can also be adjusted based on the value of the shares being transferred. It is important to work with an experienced insurance provider to ensure that the policy adequately addresses the unique requirements of the transaction. ## 8. Is title to shares insurance mandatory in M&A transactions? Title to shares insurance is not mandatory in M&A transactions. However, it is becoming increasingly common for buyers to require sellers to obtain this insurance as a condition of the transaction. This is done to mitigate potential risks and provide additional protection to the buyer. Sellers may also choose to purchase this insurance voluntarily to enhance the marketability of their shares and attract potential buyers. ## 9. What are the benefits of title to shares insurance for buyers? Title to shares insurance offers several benefits for buyers, including: - Protection against undisclosed liabilities: The insurance policy provides coverage for any undisclosed liabilities that may arise after the transaction, reducing the financial risk for the buyer. - Enhanced due diligence: The availability of title to shares insurance encourages sellers to conduct thorough due diligence, ensuring that potential risks and liabilities are identified and addressed before the transaction. - Increased confidence in the transaction: Buyers can proceed with the transaction with greater confidence, knowing that they are protected against potential risks and liabilities associated with the ownership of shares. ## 10. What are the benefits of title to shares insurance for sellers? Title to shares insurance also offers benefits for sellers, such as: - Enhanced marketability of shares: Having title to shares insurance in place can make the shares more attractive to potential buyers, as it provides an additional layer of protection against potential risks and liabilities. - Limitation of liability: By transferring the risk to the insurance company, sellers can limit their potential liability in case of any claims or legal actions arising from breaches of warranties or representations. - Smooth transaction process: With title to shares insurance in place, sellers can streamline the transaction process by addressing potential risks and liabilities upfront, reducing the likelihood of disputes or delays.

Nearly One-Third of Business Owners Speeding Up Their Exit Due to Retirement and Burnout

April 24, 2023

‍

“After experiencing pandemic business/job disruption, I believe more people have taken a harder look at what they want to do in their working lives. I think this has spurred the increase in buyers looking at listed businesses,” said Darrell Gustaveson of Murphy Business Sales of Boise, Idaho.

‍Source: BizBuySell.com

‍

This recent quarterly uptick is a positive sign that the market may be on the rebound as buyers and sellers adjust to new economic conditions. After rapid growth in the first half of 2022, with transactions up 24% in Q1 and 14% in Q2, the market stalled amid rising inflation and a series of interest rate hikes before dropping 13% in Q4.

‍

Business owners who are looking to speed up their exit plans due to retirement and burnout may be able to lower their risk by using M&A insurance. M&A (mergers and acquisitions) insurance is a type of insurance that provides coverage for financial losses that may occur as a result of a merger or acquisition. This type of insurance can be beneficial for business owners who are looking to sell their businesses or transfer ownership to a family member or key employee.

‍

One of the main benefits of M&A insurance is that it can help protect business owners from unexpected financial losses. For example, if a buyer were to back out of a sale at the last minute, M&A insurance could provide coverage for the costs associated with the failed transaction. This can help business owners mitigate the financial risks associated with selling their businesses.

‍

Another benefit of M&A insurance is that it can help provide peace of mind to business owners during the sale process. Selling a business can be a complex and stressful process, and M&A insurance can help alleviate some of the anxiety and uncertainty that comes with it. With M&A insurance in place, business owners can feel more confident in their decision to sell and can focus on other important aspects of the transition process.

‍

When considering M&A insurance, it is important for business owners to work with a qualified insurance professional who can help them determine the appropriate coverage levels and terms. Factors that may impact the cost of M&A insurance include the size and complexity of the transaction, the type of coverage needed, and the financial strength of the parties involved.

‍

Business owners who are looking to speed up their exit plans due to retirement and burnout can lower their risk by using M&A insurance. This type of insurance can provide coverage for unexpected financial losses and help provide peace of mind during the sale process. Working with a qualified insurance professional can help business owners determine the appropriate coverage levels and terms for their specific needs.

‍

From Acquisition Aficionado Magazine: We partnered with Acrisure and so can you!

February 4, 2023

Acrisure is an insurance brokerage powerhouse that provides its agent partners with unrivalled services, culture, and support, such as AI and advanced technology platforms, business services like accounting, payroll and employee benefits, legal and regulatory counselling, marketing support and more.

As a result, new Acrisure broker partners average almost 2% margin expansion after joining Acrisure. The company has grown by 100x in just over eight years, so they know what it means to create immense value. Acrisure has achieved 58% more organic growth than the industry average through innovative technology and enhanced financial services capabilities for clients like Acquirecover.

Acquirecover’s focus is to help exiting business owners. The company was founded by entrepreneurs who have acquired and exited businesses multiple times, so we understand the risks that come with the territory. We are bringing our expertise surrounding transaction liability insurance to SME markets.

By adding Acquirecover, business owners can secure holistic IP coverage for both past and future risks. Acquirecover is underwritten by Lloyd’s of London, which offers business sellers unmatched coverage and protection with a policy that strengthens your position by adding four key advantages:

1. Retain what’s coming to you

2. Reduce capital at risk

3. Avoid legal fees fighting disputes

4. Keep partner relationships friendly

‍

Read the rest of this article at Acquisition Aficionado Magazine.

Top 3 risks in tech M&A deals

More from Acquirecover

Title to Shares Insurance: Everything You Need to Know

Nearly One-Third of Business Owners Speeding Up Their Exit Due to Retirement and Burnout

From Acquisition Aficionado Magazine: We partnered with Acrisure and so can you!

Show all

Acquirecover offers a value-add for everyone, right?

Great, let’s talk.

Tell us a few details about you and your company so we can help.