Insurance is a big part of risk management. It is as important, if not more important, when you are buying or selling a business. This is especially true when you, the seller, are financing part of the deal. A seller should get protection against risks like death or illness of the buyer that could affect the newly acquired business and threaten the payment of the balance of sale. You should review the buyer’s insurance policies to make sure that there is adequate coverage. Buyers will also want to protect their investment to make sure that they don’t leave debt on their family and loved ones should they become sick or pass away.
Risk Management & the Seller
When you’re partially financing the business for the buyer, you’re actually acting like a bank or another financial institution. You should make sure that you have done due diligence before signing the deal. This includes the buyer’s financial solvency, his financial solvency, his character and background (i.e. criminal checks), and professional references to make sure that they have the skills to run the business. You should also rely on a seasoned insurance broker to determine what type of policies you’ll need.
Risk Management & the Buyer
The buyer should meet with a financial planner and an insurance broker to ensure that they have adequate coverage in place should something, like premature death or illness, happen to them. A professional insurance representative will almost always recommend that the buyer make the seller the beneficiary. Likewise, the buyer should require that the seller carry insurance to protect their down payment and monies paid towards purchasing the business.
Liability and Security
Both parties should be protected by a commercial insurance policy that ensures the business and its assets against flood, fire and theft. This should be done prior to closing on the business and should be maintained as a condition of the sale. A business interruption policy along with liability coverage is also prudent. For added security, the seller will provide the buyer with a personal guarantee. It might include shares of the business that are held in escrow or business assets.
Contact Mergex for any questions.