“If one of your partners dies do you want to remain in business with their spouse? Their accountant/ their lawyer?…. or their incredibly spoilt BMW driving son?” “If one of your partners suffered a major trauma or long term severe disability today, could surviving partners write a cheque for their share of his equity?”
Why should business owners consider Business Partner Insurance?
Every business with two or more owners should consider what might happen to the business if one of the owners dies, become totally and permanently disabled, or suffers a terminal or traumatic illness.
A business generally depends on a few people to produce the profits, provide the capital or manage the business. If there is no viable succession plan, there may be significant financial hardship for the surviving business owners, as well as for the surviving family members.
Many business owners do not consider Business Succession planning issues because they rely on their accountant and other advisers to make them aware of the risks to the Business. They are potentially at risk and need good advice about Business Partner Insurance.
The core Business Partner Insurance concepts are:
- buy-sell insurance
- debt reduction or guarantor protection insurance, and
- key person insurance
Buy-Sell Agreements or Business Wills
A buy-sell agreement involves the business owners entering into a written agreement to plan what they are to do with their respective interests in the business should any one of them die, become disabled or suffer a traumatic or terminal illness – just like having a will in place for the business.
Essentially, the agreement should provide a mechanism for the terminating business owner (or his or her estate) to sell his or her interest in the business to the continuing owners, and for the continuing owners to purchase the terminating owner’s interest in the business. The agreement should generally also recognise the means of funding the buy-sell obligations of the respective owners.
Traditional buy-sell agreements have been almost exclusively concerned with the sale of the interest in the business.
As a result, they often fail to deal with the extinguishment or release of guarantees or securities granted by the insured or a related party.
It is increasingly common for agreements to deal with both asset (buy-sell) and liability (debt reduction/ guarantor protection and key person) issues. There agreements are usually called Business Succession Agreements.
The Sleep Easy Test
- The Problem – Often a principal’s interest in a business is left to his or her beneficiaries who have no skills, experience or expertise to contribute and who may not be compatible with the surviving principal/s. The surviving principal/s may wish to purchase the outgoing principal’s shares in the business, but have neither the funds nor the right to purchase at an agreed price.
- The Questions – If something happened to our business partner, would you want to buy his/her share of the business? – Do you have a Business Succession Plan that gives you to right to buy shares in the business? – How important is it to you to be able to buy such a share in the business and keep outsiders out of your business? – If there was a way you could ensure you had the right to purchase at an agreed price, and that the money was available when needed, would you want to know about it?
- The Solution – A plan to provide the right and the cash for the surviving principals to purchase the outgoing principal’s interest, keeping outsiders out of the business and ensuring the deceased principal’s beneficiaries receive a fair price, promptly and in cash.