The management team of a successful local Mexican restaurant chain recently sold their business to a regional restaurant group based in Texas for $3m. Soon after the acquisition had closed, they were notified by their buyer that they had omitted details about various elements of their business, including several undisclosed equipment leases and labour law violations.
Undisclosed leases
The management team had mistakenly failed to disclose nine equipment lease agreements. This not only reduced the total value of assets the buyer thought they were acquiring, but also added further expense to the business, resulting in over $50k in damages. By working closely with CFC’s transaction liability claims team, the matter was investigated, settled and loss agreed within six months from the date CFC received notification.
Texas Workforce Commission (TWC) investigation
A couple of months after closing, the business was also investigated by the TWC for employment law violations. This second issue related to alleged violations of labor laws where a number of 14 and 15-year-olds had exceeded the hourly restrictions on certain weeks during their shifts at the restaurants. The TWC started an investigation and fined the restaurant chain $409k. These violations had occurred prior to signing. However, since the seller was not aware of the hour restrictions, the issue was not disclosed to the buyer. Helpfully, CFC’s policy paid for the defense costs and settling the TWC investigation.
Coverage
Both issues were covered under CFC’s transaction liability private enterprise (TLPE) insurance policy, with CFC paying out damages and defense costs in excess of $500k, representing a substantial portion of the consideration paid.
Without TLPE, the seller would not have had access to CFC’s award-winning in-house claims team and would have had to spend a considerable amount of time and money defending the claim against their buyer and the TWC. By taking out M&A insurance, the seller was able to exit their business with peace of mind knowing they will be protected against any future claims relating to their own innocent misrepresentation.
To find out more about CFC’s first-to-market M&A insurance for SME sellers, please contact the team at tlpe@cfc.com
*This case study is adapted from an R&W claim and is realistic and reasonable based on our experience.
