Upon making the decision to restructure, it is a best practice for an owner to perform a business review, examining processes, infrastructure, objectives and more. There should also be a thorough insurance and risk management review — both to assess current coverage and, more importantly, to anticipate additional or different coverage that may be beneficial under the new entity structure. If a change in entity is accompanied by a change in ownership, policies likely will need to be canceled and replaced under the new owners and legal structure.
- Buy-Sell Agreements: Contracts that protect business transition plans if a principal retires, dies or becomes incapacitated. This is strongly recommended upon taking on new business partners, as the agreements preserve the interests of remaining partners and the principal’s family or successors. Funding for these agreements can include life insurance policies.
- Directors and Officers (D&O) Insurance: Coverage that protects those who can be sued as a result of holding a leadership role with a business, nonprofit or private corporation. Amid a reorganization in which a company’s management, controlling partners and/or entity changes, such policies can ensure protection from lawsuits or claims if there are any coverage gaps.
- Tail Coverage: When a business is restructured and a new legal entity is created, it is important to consider how best to insulate the new entity from unknown liabilities of the former entity. This can be accomplished by utilizing the Extended Reporting Period of the former policy or by purchasing a tail coverage policy for the former entity (generally, for a one-year, three-year or longer period). These policies can be important to address previous professional liability exposures, such as medical malpractice.
- Representation and Warranties Insurance: Highly specialized and primarily used in very large transactions — deals of $50 million or more, for example — these policies protect against any losses stemming from unintentional and unknown breaches of the seller’s representations made during a merger or acquisition. This coverage provides a backstop for previously negotiated indemnity — or can replace required indemnification protections altogether — and offers a smoother exit for the seller. For buyers, there is a higher likelihood to succeed on a potential claim than if no policy exists, as a seller has less reason to contest.
Enjoying a New Era
Restructuring can provide new life to a business — and new challenges. Professional advisors are valuable for guiding a transition, including attorneys and financial experts who can work with insurance agents to determine the safest way to reorganize.
Check out fnb-online.com/business for products and services that support businesses in transition.
**SMALL AND SOLO**
According to the most recent data, nearly all U.S. firms have fewer than 500 employees, marking them as “small businesses” by the federal government’s definition. Their impact on the economy, however, is quite large.*
- 99.9% of U.S. firms are small businesses (33.2 million total)
- 86.5% of non-employer firms are sole proprietorships
- 74.7% of small employer firms are corporations
- 17.3 million net new jobs were created by small businesses from 1995 to 2021; 10.3 million by large businesses (>500 employees)
- Small businesses produce 43.5% of gross domestic product
*All above statistics via U.S. Small Business Administration and Tax Foundation.
Restructuring often comes at a time of expansion. View the “Tips for Successful Business Expansion” article for additional information.
