Buying a Business? Don’t Forget the Insurance!

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Starting From Scratch, Without All the Scratches

If you’re preparing to buy a business, then there’s really only one thing that you need to know: Expect the unexpected.

Buying an existing business or brand is tricky. Every company has secrets—hitches, glitches, hidden problems, but also untapped resources—that you won’t discover until you’ve owned the business for a while.

The best way to avoid excessive and unnecessary risk is to do your homework..

The flip-side of every opportunity is risk—every “venture” is, by definition, a risky or daring journey. And every business is just that: A risk, an opportunity, a venture, an adventure—nothing ventured, nothing earned, as they say.

However, just because you are embarking on a dodgy, daring journey, that doesn’t mean you can’t protect yourself from common or severe risks. After all, that’s why you’ve chosen to buy an existing business.

You are interested in entrepreneurship, you see an opportunity for profit, and you would prefer to minimize your risk by acquiring a business that is already operational.

Avoid Unnecessary Risks, Insure Yourself Against the Rest

Buying a business? The best way to avoid excessive and unnecessary risk is to do your homework. Think like an investor: You need to do your due diligence before you sign a contract, cut a check, or even make a verbal promise.

Ask the current business owner for all documents pertaining to the company’s cash flow, billing cycle, profit margins, market share, expenses, budget, revenues, or debts.

Look closely at the following items:

  • What bills does the business pay? How much will you be spending on materials, utilities, and labor?
  • Does the business have all of the permits and licenses required by law?
  • Does the business own or rent property? What are the zoning requirements of the area?
  • Is the business compliant with local, state, and federal laws, including environmental protection laws?
  • What assets does the business possess? What are the business’s debts?

Once you’re behind the wheel of your new business, you’re going to have to contend with a variety of threats—fire, fraud, theft, unhappy employees, dissatisfied customers, the works.

You could insure yourself against them all, but the premiums alone would bankrupt your business before you even had a chance to turn a profit. That’s the paradox that keeps small business owners up at night: It’s easy to go broke, just keeping yourself safe.

Your goal should be to strike a balance between security and liability. Time for another round of research! What kinds of risk and coverage are common in your industry? If all of your competitors are carrying a policy that covers them against, say, professional liability, that’s a clear sign that you need to purchase liability insurance as soon as possible.

Here is a list of insurance plans that every new small business owner should consider buying. Not every one will be right for you, but several are essential:

Worker’s Compensation: Employers are almost always required to carry worker’s comp coverage. For injuries sustained on the job, worker’s comp covers medical expenses, loss of income, and rehabilitation. Be sure to cover yourself as well as your employees, even if your state does not require it. The premium for business owners is typically very low.

Property and Vehicle Insurance: These are the no-brainers. Property insurance protects your buildings, equipment, furnishings, and inventory. It’s as essential as homeowner’s insurance, and most lenders will require that you have before they consider a loan or line of credit.

Vehicle insurance can be configured to cover any cars or trucks that your company owns, leases, or rents. Even if you use your personal vehicle for work, experts recommend that you purchase commercial vehicle insurance in order to protect your business (as opposed to yourself) from liability.

General Liability: Also known as casualty insurance, general liability insurance covers any damage or injury caused by your products, your business, or your employees. As you might expect, liability insurance is essential. A claim for serious injury can easily wipe out a small business that isn’t properly insured.

Before you purchase any insurance, speak with a broker or agent who works with businesses in your industry. A specialist will be able to help you effectively manage risk without spending a fortune.

Do you have an idea about another kind of insurance that may be necessary for a freelance business? Let us know in the comments section below!

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