Asset protection, perhaps counter intuitively, is just as important for entrepreneurs who are selling their businesses as it is for those who are running one. In fact, “selling a business” is one of my “risk factors” listed in the chart below.
Most so-called succession and exit planners focus only on the deal terms, taxation, the valuation, estate planning, life insurance sales and where your sales proceeds will be invested; these are all good questions.
But what they routinely leave out is any real plan to protect this additional wealth while you are alive.
The first and most obvious example of this failure is not being adequately insured for traditional malpractice, E&O or D&O coverage (as appropriate) after you sell or retire. This takes the form of “tail” insurance at or above the same level of coverage they carried while running the business. This is important for several reasons; the obvious one is the liability of a claim itself, the second is that the damage the claim can do to you and how aggressively it will be pursued is actually magnified when you are no longer in business. The costs of defense alone can put many sellers at a disadvantage or back them into a corner where they have to settle a claim they shouldn’t have.
Cash-rich sellers are more vulnerable to any litigation or liability than ever before because:
-They are more liquid than ever before
– They have replaced a recurring income stream with a single lump sum that has to last them “forever”
– The fact that they sold their business and in many cases, the dollar amount they received are usually a poorly kept secret, this often motivates “latent plaintiffs” including disgruntled employees and current and even former partners
– Most fail to contractually assign any payment stream to a protected entity, so that it is protected from their personal and professional liability
Business owners must remember that in many cases they will no longer have the income stream they previously did from their business to offset any claim-related losses and that they are a much better target (more collectible) than ever before. Why? Because even people with high incomes have usually not received a lump sum of cash as large as what they get from the sale of a business.
I also warn every client who is selling a business that asset protection planning is vital at the time of sale to protect the proceeds from the buyers themselves.
I remind clients that if the buyer is not as successful at running the business as the seller was, for any reason (including their own lack of bedside manner, industry knowledge or business and management skills), they and their lawyers will inevitably point to some alleged act or omission on the seller’s part, and will want to give the seller back the broken pieces of their business and get a refund. In many cases they want this refund only after they have destroyed the businesses’ credit, inventory, reputation and relationships that in most cases took decades to develop. Not ok.
Making sure that the proceeds of sale are well protected from such an exposure with insurance, the right legal structures and the right contractual protections that limit their claims and remedies on the front end is vital to ensure your continued solvency and success.