Business Ideas & Updates

Protecting your business involves putting in place strategies that will enable the business to survive if an owner suffers a tragic event.

Business succession planning combines appropriate insurance and a legally prepared buy/sell agreement. This ensures the wealth you created within your business remains with your family in the event of death, trauma or disablement.

The following should form part of any comprehensive business succession plan:

Buy/sell agreement

A buy/sell agreement ensures business continuation with minimum disruption by creating ready buyers and sellers at a fair, negotiated price.

A buy/sell agreement provides a legal mechanism by which an ownership interest in a business can be transferred from an outgoing owner to the continuing owner(s). There are many reasons why a business owner might leave a business, however death, total and permanent disablement and critical illness are all events that can be covered by a buy/sell agreement. This type of agreement is usually funded through the use of insurance. If one of the trigger events (outlined in the buy/sell agreement) were to occur, the insurance proceeds would be used to pay out the exiting partner’s share in the business. It then allows the continuing owner(s) to take ownership of the business without having to come up with the funds (through borrowing or sale of assets).

Without a buy/sell agreement in place, significant problems may occur between the departing business owner (or their estate) and the surviving business owner(s) which could destabilise the business and ultimately affect its survival.

Key person insurance

A key person is someone whose loss, either temporary or permanent, would have an adverse financial impact on the business. Key person insurance helps to reduce or counteract adverse financial effects. Businesses can use the policy proceeds to replace lost revenue, repay debt, inject capital into the business, find a suitable replacement or train other staff to fill the key person’s position. Key person insurance helps protect the financial stability of the business at this critical time.