Selling your Business: How does your insurance impact the transaction?
When you are preparing to sell your business, the incoming purchaser and their legal representatives will undertake due diligence across your business
When you are preparing to sell your business, the incoming purchaser and their legal representatives will undertake due diligence across your business, and one of the aspects that they will scrutinise is your insurance. This will typically look at the limits of indemnity to ensure that cover is sufficient, therefore it’s a worthwhile exercise to prepare for this ahead of time.
For example, it’s important to understand what will happen to your Professional Indemnity policy beyond the natural expiry date. Do you have run off cover and who will be responsible for your PI moving forward?
Here we take a closer look at how you can prepare your business for sale by getting your insurance arrangements and risk management in good order.
Sale & Purchase Agreement and Related Insurance
The Sale & Purchase Agreement (SPA) - this document lays out the terms of the sale & purchase and will include warranties and statements made by you in connection with the sale. It’s important to understand what the SPA may look like; be prepared to provide full disclosure around all aspects of your business.
Be alert as to how your SPA will be structured. Typically, this document will state that the buyer maintains any insurance and Directors & Officers run off cover.
As a seller, obtaining a zero recourse SPA may be beneficial. This should be discussed with your lawyer. Essentially the liability would be capped at £1, and the buyer is still obligated contractually to pay for any insurance.
The seller or buyer may look at Warranty & Indemnity insurance to support the disclosures made in the SPA. This insurance enables the seller to have a clean exit and limit their long tail liabilities. From a buyer’s perspective insurance can bring comfort to shareholders and investors, where it’s identified that the seller may be in financial difficulty. This may also make your business more attractive to a purchaser.
Directors & Officers
Directors & Officers (D&O) Cover - the seller’s existing D&O cover will remain in place post-acquisition covering the seller against any claims made, but only for wrongful acts committed or alleged prior to the acquisition. Be sure to get your D&O locked in with pre-price run off cover. D&O runoff insurance is an insurance policy provision that covers claims made against former directors of companies that have been acquired or merged. The typical market rate is 200%-250% but by speaking with the right broker, you could reduce this significantly.
When it comes to obtaining insurance for the SPA which is known as Warranty and Indemnity insurance, this is typically negotiated and paid for by the buyer.
Full Disclosure
Diligence from the buyer - be prepared for the disclosure information that you will need to supply and the level of detail that will be required when scrutinising your existing insurance arrangements. Buyers will be looking at all aspects of your business and an insurer must have a good appreciation of the transaction and negotiations undertaken in respect of the warranties, and confidence in the disclosures made.
Leveraging Trade Credit Insurance: A Strategic Move for Business Sellers
Selling a business is a monumental decision, one that often involves careful planning and consideration of various financial aspects. Amidst the complexities of such transactions, one often overlooked yet highly impactful tool is trade credit insurance. While commonly associated with managing trade risks, its strategic utilisation can significantly benefit business sellers in multiple ways, from driving down borrowing costs to enhancing financing options and mitigating post-deal volatility.
Driving Down Borrowing Costs
Trade credit insurance serves as a safeguard against non-payment or default by buyers. For lenders, this reduces the perceived risk associated with extending credit, thereby lowering borrowing costs for the seller. With the assurance of receivables being protected, lenders are more inclined to offer favorable terms, including lower interest rates and higher borrowing limits. This not only makes the business more attractive to potential buyers but also enhances its financial standing during negotiations.
Increasing Financing Options
By leveraging trade credit insurance, sellers can expand their financing options. Traditional lenders, such as banks and financial institutions, often prefer to lend to businesses with reduced risk exposure. With trade credit insurance in place, sellers can unlock access to a broader range of financing sources, including asset-based lenders and private equity firms. These additional options provide sellers with greater flexibility in structuring deals, optimizing terms, and ultimately maximizing the value of their business.
Reducing Post-Deal Volatility
One of the key challenges in selling a business is managing post-deal volatility, particularly concerning cash flow and revenue stability. Trade credit insurance plays a crucial role in mitigating this risk by safeguarding against unexpected losses due to buyer defaults or insolvencies. This stability not only ensures a smoother transition period for the seller but also instills confidence in buyers, thereby facilitating a seamless integration process. Furthermore, the reduced volatility enhances the business’s overall resilience and attractiveness to potential investors, paving the way for future growth and expansion opportunities.
Conclusion
In conclusion, the strategic utilisation of trade credit insurance offers numerous benefits for business sellers, ranging from driving down borrowing costs and increasing financing options to reducing post-deal volatility. By protecting against the risks associated with buyer defaults, trade credit insurance enhances the financial viability and attractiveness of the business, ultimately optimizing the selling process and maximizing value for all stakeholders involved. As such, incorporating trade credit insurance into the sale strategy is not only prudent but also essential for realizing the full potential of the transaction.
Key Preparation Points:
- Health check - Undertake a review of your existing insurance programme.
- Key Person - Where you have key personnel that are essential to your business consider Key Person insurance which may bring a level of comfort to an incoming purchaser. The right cover here is essential.
- Staff retention - Should you be concerned about staff retention prior to sale of the business you may wish to look at implementing an Employee Benefits programme which has a nominal cost to you but may help with demonstrating your core values making you more attractive to a purchaser.
- Warranty & Indemnity Insurance - Talk through the process with your lawyer and ascertain as to whether W&I insurance is appropriate for your transaction.