By Simon Keir, Westlawn Senior Insurance Specialist 21 October 2014
Sometimes things don’t work out as we expect. But as eternal optimists, many business owners don’t like to dwell on what could go wrong but instead focus on the future in a positive light. An admirable quality indeed, but sometimes we need to also consider the “what ifs?”
For example, have you given much consideration to what would happen to your business if one partner suffered a disability, critical or terminal illness, or even died unexpectedly?
Would the remaining owners be in a financial position to buy out the departing owner’s share of the business? And how much should the departing owner or their estate receive for their share?
Would the remaining owners be forced to dig into their own savings to fund the buyout of the departing owner’s share? And what kind of financial strain would this place on the owners and their families?
Or, if an owner dies, would a member of their family or their estate step in and want to play an active role in the business? As can be imagined, this scenario would be far from ideal for the remaining owners, or for the effective running of the business. A new partner could prove disruptive to the business, be unwilling to cooperate with other owners, or simply lack the experience and skills required to be a key player in the business.
To avoid some of the potential problems that could arise from the loss of a business partner, including the potential failure of the business, owners need to implement an effective succession plan.
A succession plan should detail what will happen to the business should any owner decide to sell up or retire as well as what should happen if an owner were to die unexpectedly or leave the business due to disability or a specified trauma.
A crucial component of your succession plan will be how to value the business, and how to value each owner’s share. Once valuations have been determined, they should be reviewed at least annually as circumstances may change from year to year.
Valuing a business can be complex. To help you get started visit the Australian Government’s business.gov.au website on valuing your business.
Another key component of any business succession plan is insurance.
Buy Sell insurance, together with a legal agreement outlining the transfer of control and ownership of the business, can protect all business owners by providing the necessary funds to buy out an owner’s share of the business should they suffer a disability, specified trauma or death.
The legal agreement is known as a Buy Sell agreement, or Buy Sell arrangement. This typically includes the valuation of the business and value of each owner’s share together with a mandatory contract for the sale and purchase of each individual business owner’s interests.
In addition to Buy Sell insurance, business owners should also consider Key Person and Guarantor insurance.
Key Person insurance protects the business from the loss of a key person due to disability, specified trauma or death. A key person can be anyone with specialist expertise, knowledge, skills, creativity, talent or an ability to attract revenue to the business.
Guarantor insurance, also known as Business Loan Protection, enables the business to repay loans guaranteed by a business owner or director in the event of their disability, specified trauma or death.
To find out how to incorporate insurance into your business succession plan, contact Simon Keir today.
General Advice Warning The advice on this site may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial, tax and/or legal advice prior to acting on this information.
Westlawn Life Insurance Pty Ltd ABN 91 164 146 285 is a Corporate Authorised Representative (No. 444800) of ClearView Financial Advice Pty Limited ABN 89 133 593 012 AFS Licence No. 331367 GPO Box 4232, Sydney NSW 2001.