Why buy insurance for your deal?

Many SME sellers will have E&O or D&O cover for their businesses, but they can be caught off guard when they learn those policies won’t protect them during the sale of their business. The most common misunderstanding is that D&O policies will cover breach of representation in a sale, which is almost universally untrue. 

When selling your business, your buyer will likely demand that you provide representations and warranties.
If they assert a breach of a representation or warranty after the deal closes, you would be responsible for defence costs, as well as reimbursing them for the loss suffered if the claim is valid or settled.
M&A insurance is there to provide cover for indemnity and defense costs arising from a claim, protecting you from the risk of having to hand back some, or all, of your proceeds.

It is likely that your deal will necessitate an escrow so that, in the event a breach of the warranties or representations which leads to financial loss for your buyer, there is a pool of money is in place to claim against. These funds can be held for several years, which comes at a cost.
Having insurance in place can help you negotiate to remove this escrow. This is because your buyer knows that there is a fit-for-purpose policy in place, which means that their claim can be paid.
More importantly, this means that you can invest the proceeds that are otherwise tied up in escrow and reap a reasonable return over the same period.

Because your buyer can be rest assured that there is insurance in place to respond if issues do arise after the deal closes, this makes your business a more attractive proposition. In turn, you as the seller will have greater negotiating power.