In Deal Notes® 53, we discussed the growing use of Representations and Warranties Insurance (RWI) in the sale of middle market aerospace and defense companies. A question that naturally follows is who pays for it.
RWI carries real costs. The allocation of that cost between buyer and seller is a negotiated point, and it is one that is best addressed early, in the Letter of Intent (LOI), before the seller enters exclusivity.
The timing matters. Before signing an LOI and granting exclusivity, a seller typically has the most leverage, because competing buyers remain in the process. Once exclusivity begins, that leverage shifts to the buyer, and open terms become harder to move. Cost allocation of RWI is one of those terms that should be addressed in the LOI.
Based on our recent history, having the buyer pay for RWI is market in the current environment. This is not a critical term, and a transaction should not turn on it, but it is worth identifying in the LOI when possible, and preferably resolving in the seller’s favor, before exclusivity.
If you are contemplating a sale of your middle market aerospace and defense company, speak with your professionals about how RWI will be structured and who will bear its cost, and address the issue before you enter into an LOI.
Have a great day.
Troy Medeiros
Vice President
