Transactional Risk

As a business, risk preparation is always key. However, even with optimal planning, there’s always room for disruption in a steady workflow. Taking steps to minimize disruptive risk is critical to the success of a transaction, particularly when it comes to completing sensitive mergers and acquisitions.

Strategic buyers, private equity firms, and deal participants, especially across borders, need to keep transactional risk top of mind while closing deals. Common instances of transactional risks that can impact M&A activities include:

• Foreign exchange deals: Cross-border transactions create economic exposure and high volatility.
• Commodity: Fluctuation in prices impact all parties involved.
• Interest rates: Fluctuation of interest rates can also impact transactional value.
• Counterparty obligations: Relying on a partner in a business transaction always comes with a level of risk if contractual agreements cannot be met.
• Timeliness: Market condition changes can impact the time it takes for a transaction to finalize.

Tax treatments taken by buyers and sellers within M&A activities can also make it difficult to manage transactional risk, as can fraudulent conveyance.

Strong due diligence, coupled with insurance designed specifically for transactional risk, can help facilitate your deal.

Transactional risk insurance provides coverage for strategic buyers, private equity firms, and deal participants involved in mergers and acquisitions. It typically includes representation and warranties insurance or warranty and indemnity insurance, tax liability insurance, contingent legal risk insurance, and environmental liability insurance.

Insurance coverage for transactional risk allows parties in a merger or acquisition to transfer many of their risks to an insurance provider and away from their balance sheet. This allows companies to allocate them away from the transaction itself and eliminates the need for special indemnities or purchase price reductions.

Tax insurance is an example of a customized solution which can cover unknown tax issues, with each policy having a discrete “insured tax treatment,” or known exposure, that a company wishes to insure.

We help companies determine what kind of risks are involved in making transactions across a large scale, whether it involves foreign currency exposure, interest rates, or other determining factors that could impact the end deal.

Monitoring such risks on a regular basis makes it easier to measure their potential impact when a transaction is in the works. This should go hand-in-hand with proper due diligence and an appropriate insurance program.