The LOI we just signed mentions that a representations and warranties insurance policy will be used to cover indemnity risks, but it is silent on who pays the premium, diligence fees, and the self-insured retention limit. How do we negotiate these specific RWI allocations in the definitive purchase agreement to protect our cash at close?

Question

Tyler Smith · Accepted Answer

Representations and warranties insurance has revolutionized deal-making, but signing an LOI that is silent on the specific costs of the policy is a major mistake. The buyer will use this ambiguity to dump the entire cost on you at the closing table, which can easily eat up six figures of your cash proceeds. You must establish clear cost allocations before the definitive agreement is drafted. Demand that the RWI premium, the underwriting fee, and the broker fee be split fifty-fifty between you and the buyer, or pushed entirely to the buyer if they are a strategic acquirer with deep pockets. More importantly, negotiate the allocation of the self-insured retention, which is the deductible. Typically, this deductible is around one percent of the enterprise value. Agree that this deductible will be split equally between you and the buyer. This ensures the buyer has skin in the game and will not file frivolous claims for minor operational issues. Work with your leadership team during your planning sessions to ensure these transaction costs are modeled accurately. Aligning these expectations early prevents deal friction and ensures a smooth path from LOI to close without unexpected deductions from your wire transfer.