There are several things you can do to potential yourself from potential liabilities when you buy a business, including an indemnity agreement, a non-compete clause or a buy-sell protection plan.
You should also conduct an intensive due diligence before you purchase.
Usually sellers prefer that you essential buy the whole business – buying all the company’s shares, for example – so that you assume the mantle of the whole operation.
However, it doesn’t always need to be that way and there are several ways you can protect yourself from liabilities.
You can purchase only the business’s assets, for example.
Let’s take a look at the various ways you can insulate yourself from potential liabilities when buying a business.
A Thorough Due Diligence
The most important thing a buyer can do to protect themselves from potential liabilities is to conduct a thorough due diligence before closing the deal. Do not rush this stage of buying a business.
You want to inspect every aspect of the business.
A thorough due diligence check will go over any number of aspects, including:
- Existing contracts
- Financial records
- Tax records
- Licenses and permits necessary to operate the business
- Real estate
- Capital expenditures
- Current employees
- Intellectual property
- Controls and systems
This is your first line of defense against potential liabilities.
1.Consider an indemnity agreement
One way to protect yourself from potential liabilities when you buy a company is to get the seller to sign an indemnity agreement.
It’s essentially a clause in the purchase agreement that releases the seller from any liability that might arise from anything the buyer did or failed to do before the sale. The seller will reimburse the buyer for a loss or liability.
This can be extremely helpful in case you missed something during your due diligence.
An agreement of this nature will generally be more a specified period of time agreed to by both parties.
Anyone looking to sell a business would likely consider an indemnity agreement as a concession to convince a purchaser to close the deal.
Sellers will often indemnify themselves from certain matters under the buyer’s control as well but in general these agreements create more risk exposure for sellers than buyers.
2.Buy The Company’s Assets Instead of Its Shares
Another way to reduce your potential liability when purchasing a company is to buy its assets only. This means purchasing individual items like buildings, equipment, inventory or vehicles.
You are not buying the whole business, only parts of it.
As a result, you are generally not responsible for the seller’s debts, obligations, or liabilities after the sale.
This can be an appealing option for a buyer because you can pick and choose what you want to buy instead of getting the whole thing. There may be more desirable aspects of a business that you want and some aspects you want to avoid altogether.
It gives you flexibility.
This can also be advantageous from a tax perspective because the purchase price can be deducted from income over several years as depreciation.
3.Get A Non-Compete Agreement
Another way to insulate yourself from potential risk after buying a business is to get a non-compete agreement from the seller.
This will help ensure that the seller, who has all the years of experience in the business you’re buying, doesn’t simply start another similar one shortly after the sale. If they did, they could easily take away key customers, suppliers, and staff if they are well-liked in the industry.
A non-compete agreement will usually state that in exchange for the purchase price of their business, the seller will not open a similar business within a given geographical area for a certain length of time.
You might also specify that the seller cannot use confidential business information such as call lists or trade secrets of the business or to share that information with another party.
4.Get A Buy-Sell Protection Plan
If you are considering purchasing a business with partners, you should think about getting a buy-sell protection plan in place before you close the deal.
This is a legally binding contract that specifies how a partner’s share of the business can be reassigned after their death or they leave the business.
This will spell out whether the shares of the deceased partner must be bought by the remaining partners.
It should also have some information about how the business will be valued.
These agreements will often use life insurance policies to pay for the purchase of the deceased owner’s shares.
Sometimes the co-owners will purchase policies for each other and the co-owners will be the beneficiaries. That way if one owner dies, the policy payout will be used to buy out that owner’s share of the business.
You can also have the business itself take out a life insurance policy on each owner with the business being the beneficiary.
If you’re thinking about buying a business, consider adding in some additional protection to insulate yourself from potential liabilities.
You could purchase only the company’s assets or get the owner to sign a non-compete clause, so they don’t open a similar business a short distance away.
You can also ask for an indemnity agreement to protect you from liabilities that arise because of the actions, or lack thereof, of the previous owner before you came on board.
If you’re buying a business with partners, you should also consider a buy-sell protection plan in the event that one of the partners dies suddenly or leaves the business.
All these steps should be taken only after a thorough due diligence in all aspects of the new business.
NOTE: This article has been provided only for information purposes and does not constitute legal advice. If you’re looking to protect yourself from potential liabilities, you should always consult with your own legal consul.