In Deal Note® 54, we wrote about Conditions Precedent – tasks that must be accomplished prior to completing a sale of your company; one of the conditions is Employment Agreements. Employment Agreements contain a variety of important clauses and provisions, one being key person insurance, which we will discuss in this Deal Note®.

Many middle-market aerospace and defense businesses rely on a small group of vital individuals. An important individual may be a senior executive, operations expert, or holds a deep relationship with major customers. In addition to assurance that key people will stay with the business post-acquisition, buyers often want protection in the event of the death or disability of a critical person. Therefore, buyers will commonly ask for an insurance policy to be in place, covering these key individuals, with the benefit being paid to the company in the event of their death or injury (“Key Person” insurance). 

This is never a pleasant thought during the sale process, but it’s something that needs to be addressed. Buyers ask for Key Person insurance to manage their risk, and protect their investment, which is often a requirement in the approval process to secure financing for the buyer. Payouts from Key Person insurance can provide the new owners with a financial buffer while they search for replacements or provide training to existing employees. Key Person insurance is common in M&A and helpful to buyers. When negotiated in a timely and optimal manner during the sale process, we are often able to help our clients negotiate their transactions so that the buyer absorbs these costs.

Have a great day,

Ryan Kirby
Junior Partner