Accountants – thinking of buying another practice?
Published: Sunday, 15 May 2022
How to protect your firm against historical claims
Due diligence won't uncover everything
The pandemic has prompted many professionals to reappraise their future and opportunities to buy accountancy practices are plentiful. The demographics of most traditional professions mean that many will be considering a trade sale route to exit.
Beyond negotiating a package that works for both parties, you'll want to protect your firm against unseen professional liability not discovered during due diligence.
We usually recommend that, as part of your purchase agreement, you require sellers to maintain separate run-off insurance. This protects your firm against exposure to claims that might arise from pre-sale work.
If nothing adverse occurs after a few years have passed, you can always approach your insurer with a view to absorbing the pre-transaction run-off risk into your own policy.
Do bear in mind though that when you do so, the past of the practice you acquire becomes part of your own history and it’s certainly something that should only be done after careful consideration.
Where run-off cover is purchased
If you agree a deal where the former owner maintains their own run-off cover remember that:
- If claims arise where the work was undertaken both before and after the practice was bought, you may need to involve both insurers in the dispute.
- Any significant claims met by the former owners run-off policy should also be disclosed to your own insurer as material to the risk, even though they will not be asked to meet the claim.
- You should always obtain a copy of the run-off policy the previous owner arranges each year so that the extent of cover is understood and insurers involved can easily be contacted.
- If claims arise during the run-off period, the run-off policy may become more expensive.
If you would like to discuss any of the points raised here please get in touch with us.