How Insurance Bridged a Trust Gap in a Petawawa Buyout

The situation

Kajan had spent most of his career building and selling manufacturing businesses, and after his last exit he set up a holding company to keep doing acquisitions, this time with outside capital behind him rather than his own balance sheet alone. Sana, a specialist physician who had known Kajan for years, put a substantial share of her savings into the vehicle as a passive investor, drawn by his track record and by the steady, unglamorous nature of the target he had found: a precision components manufacturer near Petawawa that had spent three decades supplying parts for industrial and defence-adjacent equipment, with a stable customer base and a founder ready to retire.

That founder was Dimitri. He had built the company from a two-person machine shop into a business employing close to eighty people, and after several years of quiet inquiries from brokers he finally agreed to sell, once he found a buyer serious enough to move quickly and pay a fair multiple of earnings. The agreed enterprise value landed at roughly $65 million, reflecting the company's contract backlog, its specialized equipment, and its long-standing customer relationships. Dimitri wanted a clean exit. He was retiring, not staying on to run the business under new ownership, and he had no interest in years of lingering exposure to claims arising from a business he would no longer control. Kajan and Sana's holding company, backed by its private equity sponsor, wanted the opposite: real protection against the undisclosed liabilities that surface in almost every mid-market acquisition, from misclassified employees to environmental issues at an older industrial site to tax positions nobody had tested.

The trust gap

In many acquisitions, the parties have some history together, a prior deal, a shared advisor, a mutual reference who can vouch for how the other side behaves once the ink is dry. Kajan's team had none of that with Dimitri. They had found the opportunity through a broker only months earlier, and due diligence, however thorough, cannot fully substitute for the kind of trust that builds over years of working with someone.

That gap showed up directly in the indemnity negotiation. An indemnity is the seller's contractual promise to compensate the buyer if a representation in the purchase agreement turns out to be false, and the customary way to secure that promise is a holdback, where a portion of the purchase price sits in escrow for a period after closing, available to the buyer if a claim arises. Kajan's sponsor wanted an escrow large enough, and a claim period long enough, to cover realistic scenarios: something in the range of 10 to 15 percent of the purchase price held back for two or three years. Dimitri's advisors pushed back hard. He was retiring on the proceeds of this sale, and tying up a meaningful fraction of it for years, with the money's return dependent on a company he would no longer control or even see, was not something he was willing to accept. Each side had a legitimate position. Neither was willing to move enough to bridge the gap, and after several rounds of negotiation the deal was at real risk of falling apart over a term that had nothing to do with the underlying value of the business.

This is the exact situation representations and warranties insurance, usually shortened to RWI, was built to solve. RWI is a policy, typically bought by the buyer, that insures against financial loss from a breach of the seller's representations and warranties in the purchase agreement. Instead of the buyer chasing the seller's escrow, or the seller's own assets, for a covered breach, the buyer claims against the insurer directly. It does not eliminate the seller's exposure entirely, because the policy carries exclusions and a retention amount the buyer absorbs before coverage kicks in, but it converts a large, uncertain, multi-year indemnity obligation between two parties who barely knew each other into a claim against a specialty insurer whose entire business is pricing and paying exactly this kind of risk.

What we did

1. Assessed whether the deal was insurable early, not late. RWI underwriters price policies based on the quality of the diligence behind the deal, and bringing them in only after the purchase agreement was substantially finished would have limited both the coverage available and the leverage to negotiate its terms. We approached several specialty underwriters for non-binding indications while the purchase agreement was still being drafted, so the eventual policy terms could actually shape the negotiation instead of following behind it.
2. Ran a parallel underwriting diligence process. RWI insurers conduct their own review of the target, generally relying heavily on the buyer's own legal, financial, and tax diligence rather than duplicating it from scratch. We coordinated our findings, and those of the accounting and technical advisors on the deal, into a diligence package built with the insurer's underwriting call in mind, flagging the areas, an older environmental permit on the manufacturing site and a handful of independent contractor arrangements among them, that we expected to draw the closest scrutiny and likely exclusions.
3. Negotiated the policy alongside the purchase agreement. The retention, the amount of loss the buyer bears before the insurer pays, needed to be low enough to give Kajan's sponsor real comfort without pricing the policy out of reach. We negotiated the retention down over several rounds of underwriter discussion, and structured it so that Dimitri retained only a modest personal indemnity for fraud and for a short list of specific, known matters the insurer excluded, rather than the broad multi-year exposure he had refused to accept.
4. Cut the seller-side escrow to match the residual risk. With the insurer covering the bulk of the representation risk, the escrow amount Dimitri needed to leave behind dropped substantially, to an amount that covered only the narrow carve-outs the policy did not, held for a matter of months rather than years. That single change moved the negotiation from a standoff to a signature within a few weeks.
5. Built the claims process into the closing documents. We made sure the purchase agreement, the escrow terms, and the insurance policy referred to each other consistently, so that if a claim arose after closing, Kajan's team would know exactly which document governed which type of loss, and would not need Dimitri's cooperation, or his agreement, to pursue it.

The outcome

The acquisition closed on schedule at the agreed roughly $65 million enterprise value, with a small escrow that released to Dimitri within months rather than years. He walked away from the business with the certainty he had been asking for from the start, without carrying open-ended exposure to a company he no longer had any say in. Kajan's sponsor got the protection its investment committee required, and Sana's capital went into a deal that closed cleanly instead of collapsing over a term neither side could move on alone.

The real test came about a year later, when the company's finance team, integrating the target's books into the buyer's reporting systems, discovered that a supplier rebate program had been recorded incorrectly for several years before closing, overstating historical earnings by an amount in the low hundreds of thousands of dollars. That kind of discrepancy is exactly the sort of thing a representation about accurate financial statements is meant to catch, and in a conventional deal it would have meant a difficult conversation with a retired founder, possibly a dispute over what he knew and when, and quite possibly litigation. Instead, Kajan's team submitted a claim to the RWI insurer, supported by the accounting analysis Treadstone had helped assemble showing the breach and its financial impact. The insurer investigated, accepted the claim, and paid it in full within several months, without any involvement from Dimitri beyond providing background information the insurer requested.

That outcome is the strategy working exactly as intended. The buyer recovered its loss in full. The seller, now well into retirement, was never dragged into a dispute over money he had already received and largely spent. And the relationship between the parties, thin as it had always been, stayed civil rather than becoming adversarial, which mattered because Dimitri remained a reference for the buyer's next few approaches to other family-owned manufacturers in the region. The insurance did not make the underlying risk disappear. It moved the risk to a party built to carry it, priced fairly for both sides, and let a deal close that a bare indemnity negotiation, between two parties with no history and genuinely different needs, might not have survived.

What you can learn from this