Protection When You Buy A Business
An acquisition gets professional attention on the legal and financial side and almost none on the protection side.
There are solicitors on the contract, accountants on the numbers and a lender on the funding. Nobody in that process is being paid to ask what happens to the arrangement if the buyer dies three months after completion, which is the question that would unravel all of it.
There is usually a second exposure as well, and it is the one that is genuinely unusual to this stage: for a while, the business still needs the person who sold it.
The short answer
Buying a business usually means taking on borrowing secured on the business and often personally guaranteed, at the same moment as taking on an operation you do not yet know how to run without help. The two risks worth insuring are your own, because the debt depends on you, and the seller's, if the handover or an earn-out means you depend on them for a period.
What this changes
- You have taken on substantial borrowing, often secured and often personally guaranteed
- Your income now depends on a business you are still learning to run
- The lender's position depends on you specifically, as the person who made the case
- Any handover period, consultancy arrangement or earn-out means depending on the seller
- Key staff and customer relationships may be loyal to the previous owner rather than to you
- Any warranties or deferred payments in the contract are obligations that outlive you
The bit people miss
The dependence on the seller is the exposure nobody arranges cover for. Many purchases include a handover period, a consultancy agreement or an earn-out that keeps the seller involved while relationships transfer and you learn the operation. If that person dies or becomes seriously ill during it, you have bought a business and lost the one person who knows how it works, while still owing the money you borrowed to buy it. Insuring the seller for the length of that period is unusual, straightforward and occasionally the difference between a transition and a disaster.
Insure The Handover, Not Just The Debt
This is the recommendation that tends to be new to people, so it is worth setting out plainly.
If the deal involves the seller staying on for six months, consulting for a year, or being paid out over time against future performance, then for that period the business has two critical people and you have only thought about one. The seller holds the customer relationships, the supplier terms, the knowledge of what the accounts do not show and the reason the staff turn up.
Cover on the seller for the length of that arrangement, owned by and payable to the business, is normally inexpensive because it is short term, and it buys you the ability to pay for help if the handover collapses. It needs the seller's agreement and cooperation, which is far easier to obtain while everybody is still being pleasant at the completion stage than six months later.
Read What You Promised After Completion
Purchase agreements rarely end at completion, and the parts that continue are obligations.
Deferred consideration means you still owe the seller money. Warranties and indemnities mean you may owe them something if things turn out differently from what was stated. An earn-out means payments depend on performance you now have to deliver. All of these are commitments that do not stop existing if you do, and they land on your estate alongside the lending.
It is worth going through the completed agreement once the dust has settled and listing what you are still committed to and for how long. That list is what the cover should be sized against, rather than just the headline loan. The tax treatment of how any of it is arranged depends on your structure, which is a question for your accountant.
What usually fits, and why
Sized against the acquisition borrowing and the term it runs for. If you have personally guaranteed any of it, this is also protecting your family from a debt they would otherwise inherit.
The way to cover the seller during a handover or earn-out, and later your own key staff. Cover on a named person whose loss would damage the business, payable to the business.
You are now the person the debt depends on. An illness that stops you working stops the business running in the period when it can least absorb it, and the loan repayments do not pause.
Common questions
What protection do I need when buying a business?+
Start with the borrowing, because that is the obligation that would otherwise land on your family or force a sale, particularly if you have personally guaranteed it. Then your own income, since the business now depends on you. Then the seller, if any handover or earn-out means you depend on them for a period.
Can I insure the person I am buying from?+
Yes, with their agreement and cooperation, which is normally straightforward to arrange at the completion stage. Cover on the seller for the length of a handover or earn-out is usually inexpensive because the term is short, and it protects you against losing the one person who knows how the business works.
The loan is in the company's name. Am I exposed?+
That depends on whether you signed a personal guarantee, which is common on acquisition lending. If you did, the company being the borrower does not protect you or your estate for that amount. Worth checking the facility documents rather than assuming the limited company handles it.
What about an earn-out?+
An earn-out is an obligation on both sides that continues after completion, so it is worth looking at from both directions. If payments depend on performance you have to deliver, your own ability to keep working matters. If the seller is involved in delivering it, their continued involvement matters too.
When should I arrange this?+
Before completion if possible, and certainly as part of the same piece of work. Cover on the seller in particular is much easier to agree while the deal is being done than afterwards, and the lending usually starts on day one whether or not the protection does.
Cover that often goes with this
The gaps we most often find sitting next to this one.