Flippa’s Industry-First Buyer Insurance Product for Small Business M&A Opens Opportunities for Global Growth

Buying a business always comes with a dose of risk. The buyer, despite conducting due diligence, has no way to be 100% sure that the seller has disclosed all the facts about the business that is for sale. Many first-time sellers may not disclose information (often completely innocently), and due diligence norms vary hugely between industries and working cultures. This is where representations and warranties (R&W) insurance comes in. This type of mergers and acquisitions (M&A) insurance protects buyers from losses that may arise from misrepresentations by sellers - whether innocent or fraudulent.

However, R&W insurance has only traditionally been available for larger deal sizes, often in the tens or hundreds of millions of dollars. As no such product was available for smaller businesses, this made buying a small business a proportionally larger risk than buying a big business, causing investors to shy away from this particular asset class. This is despite the tremendous growth potential of small businesses, especially in markets outside of the US, and the very attractive multiples and valuations on offer.

Seeing this gap in the market, Flippa, the leading global platform for buying and selling online businesses, has launched Buyer Protect, the first-ever insurance policy designed to provide R&W cover for small business acquisitions between $15,000 and $5 million. This product gives peace of mind to buyers of small businesses, enabling the buyer to make a claim of up to 100% of enterprise value for losses resulting from the seller's non-disclosure of information which impairs the value of the business over the 18 months following a transaction.

Buyer Protect is offered by CFC Underwriting and can be purchased on Flippa from Rubicon Insurance Services, a specialist M&A insurance broker. The product is currently available to US-based buyers, but the seller can be located anywhere in the world. Cross-border deals can be higher risk, but they can also create more value for a buyer.

Exclusive to transactions on Flippa, Buyer Protect is seamlessly integrated into the Asset Purchase Agreement building process in Flippa’s deal room. Buyers can enter their information and the system automatically generates a quote, based on a premium of 1% of enterprise value plus taxes. Much like purchasing travel insurance, once the checkout process has been completed, the policy documents will be automatically generated and sent to the buyer via email.

According to Flippa CEO Blake Hutchison, Buyer Protect is designed to give small business buyers peace of mind through a simple, straightforward insurance purchase process that’s part of Flippa's end-to-end solution. The company has been ideating on Buyer Protect since 2019, and Hutchison says incorporating it into the dealmaking process was a lengthy project, involving extensive data integrations, manual verification of all assets on the Flippa platform valued at above $50,000, and finding an insurance provider willing to support the product.

“We had to find an insurance provider who understood the business case for Buyer Protect, and we found it in CFC. We have a scale that no other platform does: With Flippa hosting between 20,000 and 30,000 transactions per year, this makes Buyer Protect a meaningful and material product for the insurer to provide. Our team and theirs built the policy documents and reviewed them closely to create as robust a product as possible. We believe that growing a business through M&A should be accessible to everyone. But for an asset class to become accessible, it should also be insurable," Hutchison says.

Angus Marshall, Head of Transaction Liability at CFC, adds: "Flippa's reputation as a trailblazer in online M&A is further solidified with the introduction of CFC's embedded transaction liability insurance solution. This first-to-market insurance solution seamlessly integrates into Flippa's platform, providing unparalleled protection for buyers and sellers. It's a win-win for all parties involved, and a testament to Flippa's commitment to fostering a secure and efficient M&A experience."

Flippa and CFC are also launching a complementary seller-side R&W insurance policy, which derisks the transaction for the seller, in case they inadvertently make misrepresentations in purchase agreements.

Hutchison says that, in the past, small business M&A was an immature, undervalued, and less-understood asset class. However, as the digital and acquisition entrepreneurship economy has grown, the sophistication of the buyer and seller community has also evolved, and both parties are now looking for protection for their transactions.

“Buyers and sellers want to be able to trust that what they’re buying is as it states on the box,” he says. “This requires a platform like us that is able to connect the parties and provide transparency of information through our integrated data sources. It requires a provider who is willing to supply the insurance, in this case CFC, in a way that's understandable to anyone.”

Hutchison believes that launching Buyer Protect will open the gates for more investors in the US to consider buying a small business - whether at home or abroad - as it decreases the risk and makes it a viable tool for global growth. What was previously a risky asset class limited to a few early adopters can become mainstream with the first insurance product easily available for small business M&A.