Selling your business? How to mitigate the 7-year personal liability risk

You’ve grafted your whole life to build up your business. The end is in sight. You’ve found a buyer. And you can almost feel the stress trickling away.

But then there’s that pesky knowledge that when you sell all or part of a business, you are personally liable for any accidental breaches or misrepresentation about the business you’ve sold for up to seven years after the sale. Which means, if the business turns out NOT to be the business your buyer thought they were buying, you could be on the hook long after you’ve sold your business.

In fact, you may be more at risk after you’ve sold your business than when you were running your business. Because when you’re a limited company, your liability is limited to your shareholding in the business, but when you sell, you are personally liable for any mistakes or misrepresentations in the Sale and Purchase Agreement. Which means you could be pursued for significant sums, and your home and bank accounts and any personal assets could be at risk.

“When you sell your business, the Sale and Purchase Agreement will likely include clauses and statements about the business’s financial health, assets, liabilities, employees, property, and taxes. If issues or innocent breaches are discovered after the transaction completes and cause financial loss, your buyer could sue you for misrepresentation. And such claims could be made for up to seven years, or more, after the sale.”

John Goodson, Client Director, Macbeth Insurance

 

So, what if you could float off into the sunset and not have to worry about being sued?

But mergers and acquisitions insurance is only for the massive corporate transactions, right? Wrong!

Mergers and acquisitions insurance (also known as warranties and indemnities insurance) used to only be available for the big, corporate businesses being sold for millions and millions. But there are now new products on the market designed for smaller businesses and mid-corporates.

SME mergers & acquisitions insurance for sales between £250k and £20 million

 For the first time, mergers and acquisitions insurance is now available for business transactions between £250k and £20milion. And, unlike traditional M&A insurance, which is limited to 10% of the enterprise value, this smaller business insurance protects you for 100% of the value, up to £20 million.

But it’s not just reducing your risk as a seller. Taking out a mergers and acquisitions insurance policy can reassure an uneasy buyer and smooth your sale. Because it gives your buyer comfort and confidence that cover is in place for innocent inaccuracies or misrepresentation.

5 little known benefits of SME mergers and acquisitions insurance

#1 It’s a one-off premium

SME mergers & acquisitions insurance lasts for 7 years and you only pay once. It’s flexible too – you can take out a policy before you sell your business or at the time of the sale. And if you’ve already sold your business and you’re wishing you’d known about this insurance before now? Don’t worry. You can take out SME mergers and acquisitions insurance shortly after the sale of your business, as long as there hasn’t been a claim.

#2 It’s available for business sales as low as £250k

Premiums start from under £4,000. Which is significantly less than if you were sued for the total value of your business sale because of an innocent mistake.

“When I sold my business, I was looking at all the clauses in the Sale and Purchase Agreement and thinking this is really quite scary – I’m on the hook personally and they could come after my house, they could come after everything. It was a no-brainer for me to invest in this insurance vs the cost of being sued.”  SME Mergers and Acquisitions Insurance Customer

#3 Quotes are quick

Traditional warranties and indemnities / mergers and acquisitions insurance policies are based on hundreds (if not thousands) of company documents, called a ‘data room’. But to get a quote for SME mergers and acquisitions insurance, you just need to complete an application form and provide sale documents along with your data room index. Which means we can arrange cover quickly and at a much lower cost than traditional M&A insurance.

#4 Reassurance for your buyer

You can add your buyer to your policy as a ‘loss payee’, which means any settled claims are paid directly to your buyer. This makes your life much easier in the event of a claim (particularly if you’re enjoying your new-found freedom abroad).

#5 Cover is available for sellers AND buyers

Although SME mergers & acquisitions insurance covers accidental misrepresentations (which is reassuring for buyers), it doesn’t cover intentional negligence or fraud. But, buyers can also take out a separate, optional Fraud and Negligent Misrepresentation policy to protect themselves against fraudulent or negligent misrepresentation by the seller.

Selling your business and want peace of mind after you’ve sold it?

SME mergers and acquisitions insurance helps you avoid the 7-year personal liability trap and reassures your buyer – a positive step forward for smooth SME mergers and acquisitions.

Need advice or want to know more? We have practical, lived experience of this new insurance and a great relationship with the insurer – email us or call and ask to speak to John.

Email John Goodson or call 0118 916 5480