Recently I had a client contact me with the news that he had closed the day before the sale of his business. While I was initially happy for this particular client, there were concerns in my mind about first learning of the sale after the close. As your outsourced risk advisor, we are in the best position to protect your assets by taking the time to discuss upcoming changes in your business before they happen. In this post I would like to analyze the above situation and how we could have reduced the risk exposure for our client by being involved sooner in the process.
When the sale of a business occurs, there are two main methods that are utilized. The first method is a stock sale. In this method the stock of the entity is sold. The buyer essentially takes over responsibility for the entity moving forward. This includes any unexpected profits, but more importantly also includes liabilities that may potentially be unknown to the buyer. Only a minority of sales take on this form.
The much more common method of selling a business is referred to as an asset sale. In this form the new buyer is separating themselves from the prior entity from a legal standpoint. This opens up a number of areas that we would want to be involved in as your outsourced risk advisor.
Following an asset sale of a business, one of the more common areas of exposure I’ve encountered is associated directly with the client’s liability policy. More often than not, I’ll come across a client that has their liability policy written on an occurrence basis. As an example, let’s pretend the client mentioned above sold widgets; and one year after the sale of the business a widget fails causing either bodily injury or damage to the property. The insurance coverage in force at the time of loss is the policy which would respond. Unfortunately, the most likely scenario is that our owner above would no longer have insurance in force and therefor no protection.
As previously mentioned, I wish I would have been involved prior to the sale of the business in this scenario. Our team likely could have assisted the client to negotiate in the sale that the new firm would have been required to name the prior entity as an additional insured. This can be done for a very small premium. The other alternative, which is all that is available for the above insured, is a discontinued operations policy. Not every carrier offers this form of protection and for the first year of coverage the premium is equal to the previous year of operations liability premium; which is much more expensive and takes away from the net sale proceeds.
Contact us today to learn more and remember to please keep your designated risk advisor informed regarding upcoming changes to your business.
Posted by: Mark McCabe, Risk Advisor - Burkart-Heisdorf Insurance Agency