Buyer Beware: 6 Things to Ask the Seller for When Buying a Business

By: Rose Gundersen, Small Business Liaison with WA State Department of Labor & Industries

Did you know when you buy an existing business — or a part of one — you assume the workers’ compensation claim liabilities of that business? It’s true. The new business owner inherits the claim responsibilities and their impact on premium rates.

How to protect yourself
To uncover potential hidden future expenses and risks, ask the seller to disclose the following 6 items before you buy a business. (This information isn’t usually included in financial documents and L&I can only disclose it to the current business owner, not to a potential buyer.)

1. Injury and Cost Profile: This 1-page report covers a 5-year history of workers’ compensation and injury data for the business, including:

  • Premiums which may include savings from a Claim-Free Discount or higher rates due to time-loss or disability claims.
  • Total number of claims per year.
  • Experience factor (over 1.0 means higher rates).
  • Claims-Free Discount history.
  • Top 5 types of injuries specific to the industry and the injury types incurred by the business.

2. Injury Report: This report shows the claim expenses incurred by the business without revealing identifiable information such as the injured worker’s name or the claim number. Claim expense categories include medical, time-loss, partial permanent disability, pension, and more.

3. Estimated Future Rate Projection: This predicts the business’s future experience factor and premium expenses, assuming that the business data remains unchanged.

4. Safety and Health Consultation Report: The business’s workplace safety culture is an intangible asset or risk that you’ll inherit as a buyer. Scheduling a no-cost, risk-free L&I safety consultation will help you assess this culture and evaluate whether it is an asset or a risk. The consultation includes a walk-through visit to the worksite to look for workplace hazards and an evaluation of the Accident Prevention Program. The business can’t be fined as a result of the consultation. Correcting serious hazards, however, is required with no financial penalties.

5. Occupational Safety and Health Act (OSHA) Log Records: Businesses with 11 or more employees may be required to record workplace injuries and illnesses on an OSHA 300 log (OSHA.gov).Reviewing these logs will inform you of hazards and the effectiveness of workplace health and safety programs. (The business must keep these reports on site for 5 years.)

6. Risk Management Consultation: This free consultation provides a review of the business’s injury history and a step-by-step plan with best practices to help control costs. If you plan to proceed with the purchase after learning the injury history and safety culture, a risk management consultation is an excellent mitigation step.

Partial business purchases
Even if you purchase only a part of a business, you can inherit the seller’s workers’ compensation liabilities. For example, if you bought a customer list, inventory or other partial assets and employees working in those reported risk classifications were injured on the job, you could potentially assume the claim liability.

Example of potential impact
To better understand workers’ compensation rates, remember that:

  1. The risk class reflects the overall loss history of each industry.
  2. The experience factor reflects the loss history of the business.
  3. A claim affects a business’s experience factor for 3 years, but your rate won’t be affected for 2-3 years after the injury date.
  4. An experience factor above 1.0 means more claim liability than average for that industry. An experience factor below 1.0 means less claim liability than average for that industry.

Assuming 10 full-time employees working 480 hours per quarter, here is an example of how various experience factors could affect the annual premium you’ll pay.

Table showing how a business's experience factor affects workers' compensation premium rates. Row 1: Telephone clerks with a risk class base rate of $.1569/hour will cost $3,012 at a 1.0 experience factor, $2,711 at a 0.9 experience factor, and $6,025 at a 2.0 experience factor. Row 2: Roofing work with a risk class base rate of $7.6753/hour will cost $147,366 at a 1.0 experience factor, $132,629 at a 0.9 experience factor, and $294,732 at a 2.0 experience factor.

More resources
If you’d like to learn more about ways to protect yourself and manage premium costs for your business, visit www.Lni.wa.gov/ControlMyCosts or our Help for Small Business web page.

Cyber Security

By: Kate Hoy, Washington PTAC Business Analyst

The buzzword of the year! Cybersecurity! What is it and what does it mean to you, the small business owner?

The formal definition of cyber security is “ ….the body of technologies, processes and practices designed to protect networks, computers, programs and data from attack, damage or unauthorized access” . The word cybersecurity is defined my Webster’s as “ measures taken to protect a computer or computer system (as on the Internet) against unauthorized access or attack.” So when you develop a cyber security plan, you are reassuring those outside your organization that their information is safe and secure when they interact with you via the internet.

Examples of who might be interested in your cyber security plan include suppliers, customers, government agencies, banks and other third parties.

Standards are being created and pushed out on a daily basis in an effort to provide small business owners a simple roadmap to creating their security plan. The reality is your plan will ultimately be based on your particular situation.   When thinking of your cyber security plan, it might help to think of what you did when you developed a security plan for your brick and mortar location.  You assessed the situation, identified weaknesses, put proper safeguards in place, and arranged a method of monitoring the situation over time.

This will be a similar process for developing your cyber security plan. You will look at your record keeping processes, make sure your funds are safe and secure, and develop a plan to follow when security is breached.

Many large customers as well as government agencies will require you have a plan in place prior to doing business with them.  Government agencies will require you have a written plan in place by the end of 2017 in order to sell to them.  These requirements have made cyber security the hot topic of the day as well as a high priority for many small business owners.

Start your plan by assessing your situation and documenting your procedures. This will go a long way in making those that do business with you via the internet feel safer and more secure about continuing their business relationship!

Questions on the governments requirements? Contact your local PTAC office or visit www.washingtonptac.org