Author – Evan Horst, Account Executive – Horst Insurance
Whether it’s time to retire, or you’ve received an offer you cannot refuse, selling your business will be challenging. Most owners are thinking of assets, the books, and the contracts. Not to mention the human side of the equation of letting long term employees and clients know you are selling. Selling your business undoubtedly has numerous details, both large and small, that need to be contemplated.
In most cases, the details of insurance will be an afterthought. Horst Insurance is trying to change that. We strive to be trusted advisors for our clients, not just “your insurance guy or gal.” Being a trusted advisor allows Horst the ability to navigate clients through every facet of insurance world. Selling a business has a multitude of insurance details, so let’s break them down.
We already have insurance, will it just follow to the new owner?
It depends. The structure of the sale and the structure of the business need to be contemplated whether it is a Stock Purchase vs an Asset Purchase.
A Stock Purchase is when an entire entity is purchased. In very basic terms, the only thing that is changing is the ownership. In theory, the policy will just follow to the new owners, except most policies have a change in ownership provision. This provision typically says that the insurance carrier needs to be notified of any and all ownership changes.
An Asset Purchase is when certain aspects of a business are sold. A simple example would be that all contracts are being sold. The business entity still exists, and its subsequent policies would stay with the seller and the purchaser would need a new insurance program.
Asset purchases almost always overlooks the insurance ramifications. Why would a business, who’s only real asset are contracts that were just sold to a new entity, still need insurance?
It depends on how the insurance program is designed. A Claims Made policy would respond to claims when they are reported and the policy is active. An Occurrence policy can respond to a claim that happened in the past that is being reported in the present.
This is where the problem lies: A new owner doesn’t want to report a claim that happened before they purchased the asset and a seller doesn’t want to report a claim that happened after the sale of the asset.
Understanding the structure of an entity’s insurance program and its design will determine what coverages need to be modified, added, or converted. Let’s dive into some additional coverages and policies that will need to be addressed.
Directors and Officers Coverage
If an entity has a Directors and Officers policy, it will be converted into a run-off. This is where the policy is acknowledging that it will respond to claims that happened before the sale and nothing after.
Key Man Coverage
If an entity has a Key Man policy funded by the business, it will need to be contemplated. If the employee(s) that are listed on that policy are retained by the buyer, the policy may have to be rewritten depending on how the policy was designed.
Tail Coverage
Once your business is sold, Tail Coverage may be necessary. Tail Coverage provides an extended reporting period for claims. This coverage helps resolve claims that happened under previous ownership after a sale has been made. The problem with Tail Coverage is its expense is usually not contemplated by sellers. While the sale of the business will hopefully create a monetary windfall, part of that sale price will have to fund appropriate tail coverage.
In conclusion, due diligence in the sale of your business is imperative. If selling your business is funding your retirement, this is the most important and potentially your final business deal. Take the time to investigate all aspects of the sale and make sure all of the I’s are dotted and T’s are crossed closing out your business’ insurance program.
