The founders of a successful farming seed manufacturer and distributor based in Oklahoma were looking for an investor to drive their expansion plans. However, 15 months after the business was sold for $9m, they found themselves facing the possibility of paying significant damages to the buyer, following a class action suit alleging mislabelling of their packaging.
As part of the sale, the management team made extensive representations relating to the business, including a regulatory representation that they had materially complied with all applicable laws, such as the Federal Seed Act, relating to the product. Within the representation, there was explicit mention of labelling, packaging, quality control and similar standards.
The company sold their products directly to farmers as well as third-party suppliers and distributors. The buyer received a draft class action complaint from a key supplier, which alleged that the company had mislabelled its packaging in violation of certain federal and state laws.
The buyer subsequently made a claim against the sellers for breach of their representations relating to compliance with laws and regulations. Luckily for the founders, they had obtained CFC’s Transaction Liability Private Enterprise (TLPE) insurance policy which provided them with access to our award-winning in-house claims team who were able to respond quickly to the claim notification.
CFC provided authority for the buyer to enter into settlement negotiations with the plaintiffs and the matter was concluded for a sum of $300,000. As the buyers were named as loss payees under the policy, the settlement proceeds (including the buyer’s costs) were paid directly to them within 5 months from receipt of the initial notification.
TLPE allowed the sellers to recover from a moment of crisis and a potentially hefty lawsuit without losing a significant portion of their sale proceeds. Similarly, by purchasing TLPE, SMB sellers can now exit their business and move on to their next venture with complete peace of mind.
If you have any questions regarding M&A insurance for small business sellers, get in touch at tlpe@cfc.com.
*The companies and circumstances in this case study are fictional, but the scenarios are realistic and reasonable based on our experience.
