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5 Ways to Protect Yourself When Buying a Business

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Purchasing a going concern can be a great way to go into business. The company you are buying may already have established customers or clients, smoothly running operations, trained employees, and cash flow. But buying a business can be risky – it requires dedicated due diligence. The following are ways to protect yourself when acquiring a business.

Do Your Due Diligence

Do not cut corners on this step in the process. The due diligence period is your opportunity to inspect every aspect of the business you are buying, including:

  • Real estate
  • Physical assets
  • Intellectual property
  • Licenses and permits
  • Existing contracts
  • Financial and tax records
  • Client or customer base
  • Company employees

Get an Indemnity Agreement

Even after painstaking due diligence, you could still find yourself liable for something the seller did or did not do before selling the business to you. An indemnity agreement can help protect you in this situation. The seller agrees in writing to be responsible for any unforeseen liability that may arise during a specified period of time after the sale. 

Buy the Company’s Assets Instead of Its Shares

With an asset purchase, you are buying individual assets, such as equipment, inventory, buildings, and vehicles, rather than the whole business. It gives you an opportunity to pick and choose what you buy. Generally, with this type of purchase, the buyer is not liable for the seller’s debts, obligations, or liabilities after the sale.

Get a Non-Compete Agreement

You may want to approach the seller for a non-compete agreement if you are buying a business. This can help ensure the seller does not start a similar business soon after the sale in competition with the business you just purchased, potentially taking away clients or customers. 

Get a Buy-Sell Protection Plan

If you have partners in your acquisition, you will need a buy-sell protection plan. This is a legally binding agreement between business owners that spells out what happens with the business if an owner dies unexpectedly. It addresses valuing of the business and how surviving partners can buy out the deceased partner’s interest. This plan should state clearly:

  • How to calculate the value of each owner’s interest in the business
  • Whether an owner intends to sell his or her interest to the surviving owners at death
  • Whether surviving owners intend to buy the deceased owner’s interest in the business

A life insurance policy can provide the necessary funds for surviving owners to buy out a deceased owner’s interest. 

  • In a cross-purchase buy-sell protection plan, co-owners purchase life insurance policies on each other. Each owner is a beneficiary on the other owners’ policies. If one owner dies, surviving owners receive insurance proceeds to buy out the interest of the deceased owner. 
  • In a stock redemption/entity purchase buy-sell protection plan, the business buys a life insurance policy on each owner, and the business is the beneficiary of these policies. If one owner dies, the business receives the proceeds to purchase the deceased owner’s interest. 

If you are buying a business, our agent can assist you with life insurance for your buy-sell protection plan.

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