Buy Sell Insurance – Protect the future of your business.

Buy Sell Insurance – Protect the future of your business. 

Buy/Sell Insurance

Buy-Sell Insurance gives you, as a business owner, confidence that your shareholding is protected should life throw out any unexpected challenges.

What is Buy/Sell Insurance?

Designed to manage the risk to your business if a business owner is forced to exit due to illness, injury or death, Buy/sell insurance pays a lump sum that ensures the remaining owners can acquire the departing owner’s equity and continue to run the business (if that’s what you’ve stated in your agreement). 

The risks that can be covered by buy/sell insurance are death of a partner (via life insurance), major illness such as heart attack, stroke, cancer (trauma insurance) and total and permanent disability (TPD insurance). 

Think of buy/sell like a 'business will'

Buy/Sell agreements help to minimise risks like: 

  • Remaining owner(s) having to sell the business or try to borrow money to pay out departing owner/estate.
  • Assets being frozen due to legal issues regarding the departing owner, their family or estate. 
  • The departing owner’s family trying to become an active business partner in their absence, against the wishes of the continuing partners.
  • The departing owner’s family or estate trying to sell their share to an unsatisfactory third party.

Business succession agreements

The death or permanent disability of an owner in a small medium business can be detrimental to the ongoing viability of the business as well as the families of all owners.

For business owners, a business succession agreement funded by insurance protects all owners and their families by enabling the timely and orderly transfer of ownership in the event of death, total and permanent disablement or critical illness or injury of one or more of the owners.

A successful strategy has two components: a business succession agreement and a funding mechanism. It is important that these two components are structured together. This will require us to work with your lawyer and accountant to ensure that this is appropriately documented within your shareholders agreement and  to ensure we have an appropriate business valuation.

Secure your business’s future by safeguarding your key assets. 

Invest in business insurance strategies and get the right advice to ensure continuity, resilience, and peace of mind.

Funding

There are generally three options for funding the capital requirements of a business succession plan – sell assets, borrow, or transfer the funding to an alternative mechanism like insurance. Insurance is often the most efficient means of ensuring  adequate funds are available if the owner is  departing due to death, disability or trauma.

If you have insurance funding in place  without an implemented legal agreement,  you run the risk of the insurance proceeds  being paid to the departing owner, but the remaining owners not receiving control of the business share.

Ideally, the capital required to fund the transfer should reflect:

  • Each owner’s individual (or related party owned) equity holdings; if possible this should allow a cushion for growth over a three year period, particularly if insurance funding is selected as a source of capital.
  • Sufficient capital for the settlement of any loan accounts.
  • Permanent cancellation of any personal guarantees through the elimination of the borrowings.
Insurance policy ownership

There are a number of alternatives for how to own insurance policies as part of a buy/sell agreement. For example, the policies could be self owned (by each  owner), cross owned (by each owner on the life of the other owners), owned by a business entity or an  independent insurance trust. There are benefits and disadvantages with each option and you should seek  professional legal advice on this matter. 

Self ownership is the simplest and most flexible option. The outgoing owner (or their estate) receives the insurance proceeds if a claim is triggered. If you have a spouse, you could nominate your spouse as the beneficiary so they receive the payment directly.

Each owner is responsible for paying the premiums on their own policy but you can come to an agreement to pay these through the business. You should seek tax advice from your accountant. The premiums are not tax deductible and the proceeds are received tax free.

The business succession agreement needs to be drafted to ensure that the share of business is transferred with the insurance payment counting towards the sale price.

Equalising premiums

It is important that the insurance policies continue to have premiums paid so they remain in place. The policy owner is responsible for payment but the other business owners also have an interest to make sure the premiums are paid. It is common for some form of premium “equalisation” to occur so that effectively the total premium is shared according to shareholder interests.

Related: Key Person Insurance

Key person insurance protects a business by providing a lump sum if a ‘trigger’ event such as death, disability or major illness (for example cancer) occurs.

This policy is owned by the business and the proceeds from this insurance policy are injected into the business should the key person covered suffer a trigger event.

The insurance provides a lump sum that can be used to:

  • Offset a reduction in revenue while the business restructures or a replacement is found.
  • Cover the costs associated with finding and training a suitable replacement.
  • Reduce or repay debts.
  • Protect a personal or business asset used as loan security.

Key person contingency strategies are designed to provide the business with money to offset the financial loss resulting from the disability or death of a key person.

Who is a key person?

A key person does not need to be a director or shareholder, but is an individual whose departure would likely cause havoc to the business. They’re likely to possess the following qualities and contributions:

Gets things done: They are known for their efficiency and ability to deliver results.

Builds goodwill: They play a pivotal role in enhancing the business’s reputation and long-term success by fostering positive relationships and goodwill.

Improves credit standing: Skill and efficiency not only impact internal operations but also enhance the business’s creditworthiness, leading to favourable terms with suppliers and bankers.

Contributes to revenue: Whether through direct sales and account management or through invaluable technical skills, their contribution to revenue is significant. 

BLOG: DO YOU WANT TO PARTNER WITH YOUR PARTNER’S PARTNER? 

Learn more about how buy-sell insurance works in real life and read about some example case studies in our latest blog. 

Contact Orbital Life. We’re happy to help.