What happens to the management, control and ownership of your business in the event of the death, disability or illness of one of the business partners. Essentially as the surviving partner you have 3 options to fund the purchase of the leaving partners share:
- use cash to payout the share (if you have the spare cash)
- borrow the required funds from the bank (if the bank will lend it)
- use insurance proceeds to payout the share
We focus on protecting the business income, personnel and liquidity of your business via:
- Business loan protection;
- Director’s loan account protection;
- Key employee protection;
- Succession planning;
- Business overheads cover
Business loan protection
The role of business loan insurance is to protect a business which may have difficulty in meeting its commitments under a loan following the death, total and permanent disablement or major illness of a person who is contributing significantly to its success and profitability. It also protects the estate from a personal guarantee or security that has been lodged.
In summary it provides cash to repay a business loan on the death, disability or major illness of the business owner and / or one who has given a personal guarantee, thus releasing security such as the family home and business premises.
Director’s loan account protection
Many directors / shareholders make loans to private companies and have loan accounts standing to their credit in the books of the company. These loans are nearly always at call.
Loan account insurance provides the cash to repay a loan account on the death, disability or major illness of the holder, thus avoiding a liquidity problem for the company.
Key employee protection (capital and revenue purpose)
Many businesses have an employee or employees whose skill, experience or good judgement are clearly contributing to its success and profitability. The employee(s) may be the managing director, sales manager, finance manager, the research manager, or a foreman.
A loss of a key person through death or disablement may result in a reduction of turnover. Key employee insurance will provide the employer with a ‘cash cushion’ to help offset the reduction of turnover until a replacement with the necessary skills can be found.
Business succession arrangements
A business succession agreement involves the business owners entering into a written agreement to plan what they will do with their respective interests in the business should one of them die, become disabled, suffer a medical trauma, resign or retire – just like having a will in place for the business. Essentially, the agreement should provide for the departing business owner (or their estate) to sell their interest to the remaining owners, and for the remaining owners to purchase the departing owner’s interest in the business.
The agreement should also recognize the means of funding the buy / sell put and call option agreement of the respective owners. The agreement is often linked to an insurance policy on each owner’s life.
Traditionally, there have been very basic provisions dealing with this issue in standard shareholder and partnership agreements. However, the introduction of capital gains tax resulted in potential tax liabilities for all forms of business insurance. As a result, it is now common practice to prepare a dedicated business succession agreement, in order to minimise CGT.
The business succession agreement is the legal document that defines the process for the orderly transfer of ownership. This legal agreement is very important as it ensures the transfer of equity actually takes place. If you have insurance funding in place but not implemented a legal agreement, then you run the risk of having the insurance policy proceeds being paid to the departing owner with the remaining owners not having the shares and control.
Business overheads cover
Business overheads cover will pay some of the continuing fixed expenses of your business (up to the sum insured), should the life insured become disabled through injury or illness.
The best way to illustrate the importance of business succession is through the use of a case study. Click on the link below to read the complete case study in PDF format.