January 2019 - Irrespective of their structure, few businesses have effective mechanisms in place for the transfer of equity and/or control if one of the owners is lost due to death, disablement or a critical illness.
Often, the loss of a business owner results in the demise of an otherwise healthy business simply because there was no succession plan and funding agreement in place.
A business succession plan that incorporates insurance funding protects your investment and can help to ensure the survival of your business should death, disability or critical illness occur.
Who is a key person?
Most businesses have one or more key persons whose skills, knowledge, experience and leadership ensures the success of the business.
A key person in any business may generally be defined as one whose death, disablement or early retirement may have an adverse economic effect on the business.
It is important to identify these key people and to quantify the likely impact on the business if they were to suffer an event.
Keep in mind the three basic protection needs that a business may have:
Issues for consideration by business principals:
Ensure personal guarantees provided to lenders are released.
Ensure the business itself does not suffer adversely due to illness, injury or death of a key person or business owner.
Ensure ties with the terminating principal and/or their family or estate are severed by way of a buy/sell agreement with appropriate financial compensation through insurance.
Buy / sell agreement
Arrangements should be in place so each business owner or their estate agree on the value of the business and:
Get the full value of their equity in the business at the time of their departure or death, or
Will facilitate the continuing business owners in financing a buy-out of that share of the business.
For more advice on how you can protect your small to medium enterprise, feel free to get in touch with one of our advisors.