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4 Things to Know Before Selling Your Business

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selling your business4 Things to Know Before Selling Your Business / Hidden Risks You May Not Have Considered

Mergers & Acquisitions are complex and loaded with potential pitfalls and risks when you’re selling your business.

Especially if you’re a seller.

You’re exiting a business you may have taken a lifetime to build.

You are realizing the rewards of the blood, sweat, and tears you invested in your company for years and now want to take your chips off the table.

Here are 4 key risk issues you need to be aware of so you can walk away from the business with peace of mind, and all your proceeds in your pocket.

  • Selling Your Business Issue #1: Buyers can claim a breach of contract for up to 6 years following the close of your deal.

When you sell your company you may think that your contractual obligations are complete once the deal closes.

However, many risks in mergers and acquisitions come AFTER the deal closes and in fact may not arise for many years following the close.

The Representations and Warranty portion of your purchase and sale agreement hold you responsible for the statements, documents, and forecasts you made relative to your business during negotiations and final agreement.

If the buyer believes you’ve breached any of these representations a lawsuit can be brought by the buyer.

This is why buyers typically want to hold back a portion of the deal proceeds (typically 10%) in escrow for a period of time – usually 2 years, as collateral.

But your risk, as the seller, goes well beyond that collateral hold back because you agree to indemnify the buyer for breaches of your representations which put all of your deal proceeds at potential risk.

At the very least you’ve got defense costs to deal with.

At worst you’re reimbursing the buyer for the losses they’ve suffered and claimed against you.

As I just mentioned, that could cost you the collateral left on the closing table, or worse some or all of your proceeds.

Not an event you want to think about – but it’s a risk you need to deal with.

  • Selling Your Business Issue #2: Innocent misrepresentations can destroy a deal.

Most sellers go into the sales process in good faith, they disclose all facts, good or bad that they know about, and are forthcoming with information when asked by the seller through the diligence process.

So, what could go wrong? Innocent misrepresentations are the risk that can put a deal in jeopardy.

Innocent misrepresentation is a statement by you, the seller, which is neither fraudulent nor negligent but is still untrue.

How does that happen?

Easy. You know what you know.

But the business world is rapidly evolving and changing, which means you may have blind spots you’re not even aware of.

Whether that’s changed in the regulatory environment, internal issues, employment issues, etc.

It’s these accidental or innocent misrepresentations that buyers can claim against sellers after a deal is done and the seller would be responsible.

Again, that means expensive lawsuits.

  • Selling Your Business Issue #3: What about D&O insurance? Doesn’t that protect me from these lawsuits?

This is a question I’ve heard from sellers when we talk about exit risks.

No, unfortunately, your Directors & Officers Liability or D&O policy – even if you buy “run-off” coverage will not protect you from these allegations.

Why? Because most D&O policy forms exclude claims arising from contractual obligations and the claims brought by sellers allege a breach of the reps & warranties portion of your sale contract.

How about E&O Insurance?

No, this type of claim would not trigger the E&O policy form in addition to having similar contractual exclusions.

  • Seeling Your Business Issue #4: What’s the solution to assure a clean exit?

M&A Insurance. Yes, there is insurance for Mergers & Acquisitions and it’s available in the small and medium-sized business market.

M&A Insurance also known as Reps & Warranty Insurance or R&W Insurance protects a seller for defense costs that arise from a buyer’s claim as well as indemnification for settlements.

This provides sellers with three key features:

The first is peace of mind, knowing that they are protected and their deal proceeds are protected should the buyer allege a misrepresentation covered under the policy.

The second is that with insurance the need for escrow is reduced or eliminated and the seller walks away from the closing table with all their proceeds in their bank.

And finally, M&A Insurance can help put the seller in a better negotiating position and maximize the sale price of the business.

Want to learn more?

Curious what it would cost to insure your deal?

Let’s set up some time to chat.

A short 5 question survey is all we need to get a non-binding premium indication for you in a couple of days.

If you like what you see a bit more underwriting is required but that can be accomplished in a few days so we can get you a firm bindable quote ready for your closing.


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