Business Owner
Businesses don’t plan to fail, they fail to plan.
Every business with two or more owners should consider what may happen to their business if one of the owners retires, dies or becomes disabled. Contingency planning is all about protecting the assets of your business and its owners from liabilities which may be incurred as the result of an unfortunate circumstance involving a key employee or principal owner.
Business risk planning should be part of life for all small and medium sized businesses. A well prepared business risk plan will consider the legal, taxation and financial impact on the business.
We can help you tailor a solution to your specific circumstances.
An example highlighting the importance of Business Insurance
Michelle, Lachlan, Rachel, Lloyd, Stephen and Andrea run and own a small shop that stocks retro cookware. They have equal (tenants-in-common) shares in the business and therefore each receives an equal share of the profits. The business has really taken off lately because more people are eating at home. This has made them more aware of the value of the business. They have heard about business succession insurance which would help the remaining business owners take over the business should one die or become disabled.
However, as they are all busy with running the business, the issue is put on the back-burner.
Not long after, Lachlan is involved in a fatal accident.
Result: There is no business succession plan in place to aid the transfer of Lachlan’s share of the business to the remaining owners, nor is there a mechanism in place to fund the purchase of his share.
Lachlan’s share of the business is passed onto his children as per his Will. However, they are unable to help run the business due to other work commitments. They must hire an employee to help out, which increases costs and decreases profits.
Lachlan’s children must be consulted when making business decisions, however they often have an opposing viewpoint from the other business owners.
The remaining business owners are now in a much worse position – they are working harder, earning less money and have to deal with new uncooperative business owners.
Consultation with a financial planner
Michelle approaches their financial adviser who is able to help with their business succession needs. Their financial adviser, Ruth, recommends that they seek help from a solicitor to create a buy/sell agreement and an accountant to value the business. The buy/sell agreement will be coupled with term life, TPD and trauma insurance. Ruth also advises that they seek additional advice from the solicitor and accountant to determine what entity should own the insurance.
It is decided that it is appropriate to set up an insurance trust, where the trustee owns the insurance policies. The solicitor is able to set this up for them. The solicitor also structures the buy/sell agreement so that upon death, disability or critical illness of any business owner, the departing owner’s share is passed to the remaining owners. The insurance proceeds would then be paid to the departing owner’s estate and distributed according to their Will.
Result: when Lachlan dies, this is a trigger event as specified under the buy/sell agreement. The agreement stipulates that Lachlan’s share of the business is to be transferred to the remaining owners and Lachlan’s estate receives the insurance proceeds as fair compensation. Lachlan’s children receive the proceeds as stated in the Will.
Another person must still be employed to help run the shop, however the remaining owners now have total control over the business and receive 100% of the profits.