Buying a Business? The Insurance Considerations You Need To Make
Starting a business can frighten even the most confident–and deep-pocketed–entrepreneur.
Too many things can go wrong–customers might not find your product or service as indispensable as you do, for example. Plus you might be averse to sinking so much money into startup costs and building a brand.
Those are some reasons it might make more sense for some entrepreneurs to purchase an existing business that comes closest to filling the niche they seek to fill. Yes, there still are costs involved in jumping in, but there's also a track record, existing customers and at least the beginning of a brand.
Buying a business comes with perils as well. From an insurance standpoint, you want to be careful of the risk you assume when you purchase someone else's business. Here's what to consider before you sign on the dotted line.
Buying the entity vs. buying its assets
One of the first decisions you'll have to make is whether you want to buy the small business itself or purchase its assets, including its property, inventory, the services of its employees, at least some of itlicenses and more.
You definitely should speak with a lawyer about this. But following are some of the arguments for each:
When you buy the assets, you limit your liability greatly. You'll still be responsible for your inventory and anything you sell from that point on, but you won't necessarily inherit debt, liens and lawsuits against the company (depending on how the agreement is structured).
When you buy the entity, you get the full benefit of the brand building that's gone on. You won't have to build equity for a new name – just the new management. The transition for customers and clients will be much easier.
You want to buy the entity anyway
If you buy the entity, don't do it without conducting your due diligence. Here are a few steps to take and the reasons to take them:
Search the Uniform Commercial Code database to see any actions creditors have filed against the company. While information on the claims may be limited, it will at least give you a basis for further investigation.
Conduct a lien search at the county, state and federal levels to see whether creditors have gone to court to place claims on the business to secure payment of a debt. For the search, you'll need the business owner's name and Social Security number. Some business information services will, for a fee, run a background check on the company.
Ask the tax authority for any states the business operates in for a letter of clearance stating that the seller is current on all sales and use taxes.
Examine the company's existing insurance policies
Ask the seller to give you access to his or her existing business insurance policy – you'll likely be under a nondisclosure agreement by this point anyway. Commercial insurance can vary greatly according to the risk perceived by the owner. You might not want to do something different, but this is a great starting point.
Along with the policy, you should request the following:
A description of all employee problems, including wrongful termination, discrimination and harassment claims, within the past three years.
A full accounting of the company's health insurance.
Its workers' compensation claim history.
Any business insurance claims for at least the past three years.
Buying your business insurance policy
As mentioned, the seller's policy provides a great starting point, but you might not want to copy it exactly. Here are few steps as you ponder how much coverage you need:
Assess your risk. Do you own your building or rent? If you own it, you'll need property coverage. Do customers or clients visit? If so, you'll need liability coverage to protect against someone suffering an injury on the premises. Do you make deliveries? Then you'll need commercial auto insurance. Is there a chance you'll face a malpractice claim? You'll need to protect against that.
Shop around. Don't accept the first quote you get. Premiums can differ greatly according to provider, particularly when carriers know you're actively shopping coverage.
Consider a Business Owners Policy. These policies package several protections in one, usually – but not always – including property and contents insurance, some liability protection and business interruption insurance. The latter helps cover loss of income resulting from a fire or other covered peril that disrupts business operations. Understand that BOPs do not cover professional, liability or autos used in the building. You'll also need to add workers compensation insurance; it's required for most businesses with employees and never included in a BOP.
Cutting the costs of coverage
Going forward as a small business owner, you'll want to look at ways to cut all your venture's expenses. Here are a couple of ways you can reduce business insurance costs without weakening your coverage and exposing your company to a devastating claim:
Minimize risks. Safety programs can go a long way to reducing your premiums – but you have to make sure your provider knows about them. Install burglar alarms and smoke detectors – maybe even a sprinkler system – to reduce the chance of loss through theft or fire. Look for other ways to reduce your chance of a claim.
Assess your policy annually. Make sure you're not insuring yourself against risks that you don't face. Even if your coverage needs don't change, you should shop for new quotes every year to see whether a provider will offer a better deal than the one you have.
Purchasing an existing venture can be a great way to enter the small business market. But make sure you cover all the bases – including these insurance considerations – before locking yourself into a deal.