The buyer wants us to purchase Reps and Warranties Insurance to replace the traditional indemnity escrow, but the premium and underwriting costs are high. How do we negotiate the allocation of these transaction costs and use our operating model to lower the premium?

Question

Tyler Smith · Accepted Answer

Reps and Warranties Insurance is an excellent tool for founders because it replaces a large, multi-year indemnity escrow with an insurance policy, allowing you to walk away with more cash at close. However, the premium, underwriting fees, and broker commissions can easily reach six figures. To protect your net proceeds, you must negotiate a fair cost allocation. The standard market practice is to split the total cost of the policy fifty-fifty between buyer and seller, or to have the party pushing for the insurance cover the cost. You should negotiate a cap on your contribution to the insurance premium as part of the letter of intent. To lower the actual premium, you must present a highly organized, low-risk business to the underwriters. Insurers price their policies based on the perceived risk of a future breach. By demonstrating that your business runs on a clean, documented operating system like EOS, you significantly reduce their underwriting risk. Hand the insurers your core processes, your historical weekly Scorecard data, and your documented compliance procedures. When the underwriters see that your operations are transparent and systematized rather than chaotic and unmonitored, they will write a cleaner policy with fewer exclusions and a lower premium. This preparation directly increases your net walk-away cash and ensures a smooth diligence process.