The Nitty-Gritty of a Business Purchase and Sale: Due Diligence, Part VI

By July 31, 2018 No Comments

This blog series explores the steps involved in buying and selling a business, which tend to be much more complex than many business owners realize. In prior blog posts, I explained how due diligence comes into play, the nature of due diligence requests related to the structure of the business entity that is selling its assets and to financial information, and due diligence as it relates to the seller’s customers and contracts.  In this post, I will discuss an aspect of the purchase and sale process that may be overlooked – insurance.

A purchase and sale transaction is not always perfectly timed. It may overlap the seller’s insurance renewal or the resolution of a pending insurance claim against the seller. The purchaser will want to inspect the nature and extent of the seller’s insurance coverage and ensure that appropriate coverage continued up through the transaction’s closing date. As a part of due diligence, a purchaser who is represented by counsel will generally request a list of and certificates of insurance policies carried by the seller of all types including general liability, product liability, life insurance, fire and casualty, business interruption, workers compensation and unemployment compensation. Copies of the underlying policies will be requested.

In addition, the purchaser may inquire about any prior losses incurred by the seller that resulted in insurance claims. What type of losses occurred? Were these losses fully addressed by insurance coverage? What type of deductible was paid? Were there losses that the seller did not notify the insurance carrier about? If so, why? And how were these losses resolved? Did an insurer ever partially or fully deny the seller’s request for coverage for a loss or casualty? As you can imagine, delving into this line of inquiry can give the purchaser extremely valuable information about the business – the type of information that is not often discussed when the purchaser and seller are engaged in the initial negotiations concerning the purchase and sale transaction.

Finally, the purchaser will likely ask about the existence of any ongoing claims or liabilities, or potential claims that the seller is aware of that may arise in the future. The savvy purchaser will use the due diligence process to get the seller on the record about these sorts of issues.  Once informed, the purchaser can be prepared to address these issues. Also, the purchase and sale agreement can, and should, set forth how the parties intend to address such matters after the transaction closes. By providing a roadmap for the seller and purchaser in addressing the responsibilities and liabilities related to potential and ongoing insurance claims, the parties reduce the likelihood of conflict and litigation after the transaction closes.

My next blog post will continue to discuss due diligence.

Photo credit: Pictures of Money on Flickr

This post is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting with an attorney.

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