Why R&W is no longer optional.

R&W insurance lets the buyer hold a smaller indemnification cap. R&W insurance also lets the seller take a cleaner exit at the wire. It is one of the few M&A products where both sides win, if it is priced into the LOI.

In a traditional M&A deal, the seller represents and warrants that certain facts about the business are true. If those facts turn out not to be true, the buyer has a right to be indemnified, usually capped at 10 to 15 percent of the purchase price, held in escrow for 12 to 24 months. That escrow is the cost of risk allocation.

R&W insurance reallocates that risk. The buyer purchases an insurance policy that covers breaches of seller representations. The seller's indemnification exposure drops from 10 to 15 percent of EV to something closer to 0.5 to 1 percent of EV (the retention layer the insurance does not cover). The escrow shrinks accordingly.

The seller takes a cleaner exit. The buyer gets coverage that, in most cases, has a deeper pocket than the seller's escrow ever would.

Both sides win on the structural level. But only if the timing is right.

The trap is treating R&W as a closing-mechanics item. By the time you are pricing R&W in the last three weeks before close, you have already lost the carrier appetite leverage you had at LOI.

Here is how to do it right:

Within two weeks of signing the LOI, engage an R&W broker. Get a non-binding indication on a clean deal in your size band ($25M to $100M EV) within seven business days of the engagement.

Negotiate retention to 0.5 percent of EV in year one, dropping to 0.25 percent of EV after twelve months. This is the standard market for clean lower-mid-market deals.

Confirm the policy follows form on the purchase agreement, not the other way around.

Read the exclusions before you read the price. The standard exclusions are: known issues, tax matters covered by a separate tax indemnity, environmental issues at specific sites, and any matter the buyer's diligence specifically flagged.

Get bound at the signing of the definitive agreement, not at close.

R&W is no longer optional on most independent sponsor deals over $20M EV. The LPs expect it. The lenders prefer it. The sellers benefit from it.

Put it in the LOI early. Get the indication in week two. Bind the policy with the definitive agreement.