THE RISK:

Before finalizing a deal, buyers need to secure adequate coverage to take on your company, which requires a thorough investigation of your insurance program and contractual requirements. If you’re unfamiliar with your policies and contracts, or make it hard to access information, you may seem uncooperative or disorganized, deterring potential buyers from following through on the deal. Beyond the financial and legal implications, being seen as neglectful or deceptive in an M&A transaction could also damage future business opportunities and harm your long-term prospects for a new deal.

PRO Tips:

Make insurance planning a key component of your negotiations to prevent last-minute complications. Work with the buyer to help them understand your insurance program and the obligations they’ll inherit post-acquisition. Share details about your coverage terms, limits, deductibles, policy expiration dates, claims, and the names of your insurance providers. Provide any relevant prior insurance applications so buyers can review the underwriting information and address potential issues well in advance.

Additionally, involve your insurance broker early on, well before the transaction is underway. A broker can advise you on the M&A process, offer strategies to protect yourself, and ensure no stone goes unturned. They can also provide valuable information to facilitate the sale, such as risk mitigation strategies and insurance costs. For example, many insurance policies contain a “Change In Control” clause, which allows the insurer to cancel the policy when a sale is finalized. Working with a broker can help you identify and manage this clause properly and prevent any issues.

RELATED: Data Breaches: How Staffing Firms Can Prepare for Unexpected Lawsuits

THE RISK:

Transparency is crucial during M&A transactions. As the seller, it’s your responsibility to inform the buyer of any potential liabilities, pre- and post-acquisition; failure to do so could have major repercussions. Undisclosed issues or claims can erode buyer trust, strain relationships, necessitate renegotiation during the sale, and put the buyer at risk of having no coverage.

If a claim arises after the sale or if a buyer discovers you misrepresented facts—unintentionally or not—they could file a lawsuit for breach of representations or warranties and demand compensation from you after the deal closes. This could come from the escrow fund or through legal action. Not only would you lose some, or all of, the sale proceeds, you might have to compensate them for any losses incurred or even pay penalties if regulators get involved.

In extreme cases, the combined costs of legal fees, damages, and fines can erode trust among partners and stakeholders, threatening existing business relationships and even drive sellers to bankruptcy. Plus, neglecting to inform your insurance company about potential claims could lead to denied coverage, leaving you personally liable for financial losses.

PRO Tips:

To mitigate the risks associated with prior acts, be sure to fully declare any circumstances that could potentially give rise to a claim to the buyer and to your insurance company, including pending litigation, contractual obligations, financial liabilities, and more. That way, all parties are aware of the risks involved. Maintain clear documentation and evidence to support this. Plan ahead and make sure you have a clear plan for handling any liabilities that emerge both during and after the sale, whether that’s by setting aside reserves or securing specific insurance coverage.

RELATED: Document Like a Pro: Tips to Protect Your Career from Allegations

THE RISK:

Overlooking insurance can also lead to gaps in coverage, especially for ongoing liabilities that existed prior to the sale. Some insurance policies stipulate that coverage ceases immediately once the seller is no longer the controlling entity. If your insurance lapses or is cancelled due to the change in control clause, you could still be held liable for incidents that occurred before the sale but were discovered afterward.

Why? Most Professional Liability Insurance policies are claims-made; coverage will only apply to claims that are made against you and reported to the insurance company during the policy period. Without active coverage at the time a claim is reported, you may bear financial responsibility, even if you’ve sold the staffing firm.

PRO Tips:

Thoroughly review all of your existing insurance policies well in advance of the sale. Identify any clauses that might cancel coverage upon the transfer of control and plan accordingly. Depending on whether it’s a stock or asset sale, consider purchasing an Extended Reporting Period (ERP), also known as “tail coverage” or “run-off coverage.” An ERP preserves your right to report claims for a defined period of time following your policy’s cancellation or non-renewal. Specifically, that includes incidents that occurred while that policy was active (prior to the transaction), but that you only become aware of following the cancellation or non-renewal (following the transaction).

While the duration of the ERP will depend on the policy type, contractual obligations, and risk profile of your staffing firm, it’ll prevent coverage gaps and protect both you and the buyer from any unexpected risks for a defined period of time. It’ll also help you maintain compliance; many client contracts require the vendor to maintain insurance for a set period after services have been delivered. Check your contracts to confirm the specifics.

Keep in mind: you’ll need to decide which party pays for the ERP, which can be quite pricey depending on how long you need or want coverage. The buyer might view it as your responsibility since it covers past mistakes from before the sale. Alternatively, you might see it as a buyer’s expense, as it reduces post-transaction risk. Every deal is different, but ERP terms should be negotiated before the transaction closes. Sometimes, you might have to pay upfront, with the seller’s broker holding the premiums until closing. Be sure to get the numbers and talk through options with your broker.

RELATED: The 8 Most Frequently Asked Questions About Professional Liability Insurance

THE RISK:

Directors & Officers (D&O) Insurance is a crucial part of any company’s insurance program and risk management strategy. It protects business leaders and board members if they’re personally sued for any actual or alleged wrongful acts in managing a company, including poor governance, failure to act, financial losses, employment matters, and more. It’s particularly critical for Staffing & Recruitment firms, who face heightened exposure from wrongful dismissal, misclassification, employee, and independent contractor lawsuits.

Given the higher risk of liability, most buyers insist that sellers maintain D&O Insurance and purchase an ERP to protect directors and officers against claims arising after the sale. For example, minority shareholders who are unhappy with the deal terms and feel their interests weren’t adequately considered might sue other shareholders for oppressed rights. Key individuals from your team may choose not to join the new company, leading to potential severance issues or lawsuits if not handled properly. Without D&O coverage, you’ll be personally liable for these claims.

Despite the importance of this coverage, many business owners put off buying a policy until a sale is underway, often due to cost concerns. But purchasing D&O once a deal is underway can be a lot more expensive, as insurance companies tend to raise premiums significantly due to the urgency of acquiring coverage and the heightened risk of misrepresentation during a sale. Since ERP costs are based on the annual premium of the D&O policy, delaying purchase can make this coverage even more costly.

PRO Tips:

Be proactive and secure D&O Insurance well before you even think of selling—it’s just smart risk management. In today’s increasingly litigious society, corporate practices are under a harsh spotlight and claims of mismanagement can come from a variety of sources: employees, shareholders, investors, regulators, vendors, and more. And unfortunately, the consequences can be severe. If your company can’t, or won’t, reimburse your losses, you’ll have to pay out-of-pocket, putting your personal assets at risk.

A D&O Insurance policy will shield both your company and personal assets and it’s reasonably affordable when purchased in advance. That way, you can avoid inflated costs and ensure comprehensive protection. Request an ERP to ensure your business leaders have coverage for any potential claims that may emerge post-transaction. An ERP of 6 years is generally recommended to ensure past tax liabilities can be properly covered.

Additionally, take measures to prevent disputes during negotiations. Engage with minority shareholders right away to address their concerns and curb any potential for litigation. Develop a thorough offboarding plan to transition employees to the buyer’s company and negotiate agreements with key individuals to ensure their commitment to the new company.

RELATED: 3 Management Risks Faced By Staffing Firms (and How D&O Insurance Can Help)

THE RISK:

Shareholder agreement is critical, especially if multiple shareholders are involved. Remember: all shareholders must agree to the terms of the sale, including the representations and warranties outlined in the Sale & Purchase Agreement (SPA). If some shareholders are uncomfortable with these terms, it could lead to disputes or complications down the line, further increasing your risk.

PRO Tips:

Transaction Risk Insurance is a valuable tool for mitigating disputes and securing shareholder approval for sale terms. This specialized coverage addresses the unique risks of M&A transactions, which are often not covered by standard insurance policies. Although it’s typically purchased by buyers, Transaction Risk Insurance can also be bought by sellers to protect all involved parties from losses caused by unforeseen circumstances related to the representations and warranties in the deal. This is especially important if the sale is part of a retirement plan, where securing appropriate coverage is crucial.

RELATED: Buyer Beware: Navigating M&A Risk in the Staffing & Recruitment Industry (Part I)

THE RISK:

On the operational side, there’s the risk of losing key relationships that the buyer expects to acquire. After all, when a buyer purchases a firm, they’re not just taking over your physical assets or contracts—they’re also buying relationships with your biggest and most important clients. The buyer wants key individuals from your team to transition these relationships post-transaction to ensure continuity of revenue. If these key individuals or client relationships aren’t effectively transitioned, the buyer might not gain the expected value from the acquisition. This disruption could lead to financial losses, disputes, or even legal action against you as the seller.

PRO Tips:

While Transaction Risk Insurance doesn’t directly manage the transition or key individuals or client relationships, it can mitigate the financial fallout if their departure or termination constitutes a breach of the sale terms. For instance, if the loss of a key relationship results in financial impact or the buyer feels the SPA warranties are breached, Transaction Risk Insurance can potentially cover the seller’s liability.

If your buyer doesn’t have Transaction Risk Insurance already, encourage them to consider it by highlighting the benefits for everyone involved. Make sure all parties understand how this coverage protects their interests, leading to a smoother and more successful transaction. Clearly define roles and responsibilities, including who will purchase the policy and whether or not you should contribute to build confidence and ease negotiations. By proactively addressing these details, you can protect all stakeholders and enhance the deal’s appeal for buyers concerned about retaining key employees and customer relationships.

THE RISK:

Consider the continuity of your Cyber Insurance coverage. Once the transaction occurs and you’re no longer the majority owner, your existing Cyber Insurance policy may automatically cancel or go into run-off. This means that unknown breaches at the time of the transaction, but get discovered after the transaction may not be covered. For the buyer, dealing with this breach could be expensive and constitute a breach of a representation or warranty in the SPA. As a result, an Extended Reporting Period (ERP) should be considered. The ERP may cover claims arising from incidents that occurred before the sale, but aren’t discovered until after the transaction closes. For the buyer, making a clean break from unknown past liabilities can be valuable.

Given that the buyer is acquiring not only the business but also its information and data, it’s crucial for you to have a plan in place to ensure that all data and systems are fully up-to-date and secure before the sale. This could include having a third-party cyber security firm do both a scan and assessment of the risk to give all parties confidence that the data is secure and malware-free and the chances of a breach surfacing are minimal. This further minimizes the risk of cyber incidents during and after the transition, protecting both the seller and the buyer from potential liabilities.

PRO Tips:

Preparing for the sale involves more than just financial or legal considerations. Make sure to allocate sufficient time and resources to review your data storage and protection protocols. Have a third party cyber professional assess your systems and ensure they are updated with all the latest security patches and fixes before the transaction to ensure that all data is current and secure and protected from cyber threats. This not only safeguards your business but also adds value, making it more attractive to buyers by giving them confidence in the integrity of the acquired data.

Consider purchasing an ERP for your Cyber Insurance to cover any claims related to incidents that occurred before the closing of the sale. In most cases, your corporate data is one of your most valuable assets which is why it needs to be fully screened and secured.

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