Given that an extensive review of unused tax assets is not always possible prior to the completion of a transaction, with buyers rarely having access to the seller’s auditors or tax advisers, there is often uncertainty around the ability to use them after an acquisition to offset future taxable income. Gallagher’s insurance solution provides the buyer with certainty on their return by locking in the anticipated value of a tax asset before a transaction has completed.
Although Warranty & Indemnity (W&I) insurance protects against losses arising from a seller’s breach of warranty or tax covenant, cover in the event of non-availability of tax assets is unlikely to be provided and is typically excluded from these policies. Standalone tax cover can now be bought alongside a W&I policy, allowing underwriting to run parallel to the W&I process, without disturbing deal negotiations.
In order to secure cover, the buyer is required to provide evidence of a robust financial model with a demonstration of valuation methodology, and conduct buy-side analysis to consider any events that could prevent a tax asset from being available in the future. Pricing and availability of cover is determined by factors including quality of information, proposed use of tax assets and the nature of the tax issue.
Richard Hornby, Associate Director of Transactional Risks, Gallagher, said: “Though M&A insurance first came to prominence in 1990s, in the last five years, there has been a significant uptick as financial sponsors and corporates increasingly seek cover to secure investments and enhance returns. Buyers are looking for specific deal value protection mechanisms for transactions which are currently being negotiated – and finding the right partners in the insurance market to help them to do so has never been more important.
“Whether and to what extent tax assets can be utilised by the buyer in the future can affect the valuation of the target company. Our bespoke product offering enables transactions to proceed that might otherwise falter due to deadlock between the parties around tricky negotiation points such as this – it provides both sides with greater certainty when moving forward with a transaction.
“Gallagher has one of the largest and most experienced teams of transactional risk insurance practitioners in the market, and our new product launch reinforces our commitment to helping our clients to successfully close deals and enhance investment returns through innovative solutions.”
Dawn Bhoma, Managing Principal of Icen Risk, commented: “We are delighted to have worked with Gallagher on various M&A transactions where insurance has enabled buyers to unlock tax value - typically where a business has incurred costs for research, development or capital expenditure.
“We’re proud to be able to offer bespoke and innovative tax insurance products, which are used to great effect by funds and investors. The policies can insure both the historic use of tax assets but also their future use to create certainty in modelling returns.”