Buy - Sell Insurance
"potential exposures can be negated by the implementation of a well structured buy - sell arrangement."
Business Succession Panning
Most succession planning looks to prepare for an orderly funded exit strategy upon retirement of one or more proprietors. The role of life insurance and other ‘risk’ products is to ensure that a catastrophe along the way does not prematurely destroy the plan.
It stands to reason that many private businesses are the key part of the owner’s own personal financial security. The need to protect their business and family interests against catastrophe is paramount. It is therefore important for owners to ensure the necessary funding mechanism is in place to buy-out each owner’s share in the event of certain triggers e.g. the occurrence of a critical illness, permanent disablement, illness resulting in an inability to work, or even death.
A Buy / Sell Agreement in simple terms provides a mechanism for business owners to enter into a written agreement to reflect their wishes with respect to their interest in the business should a trigger event occur. The agreement is used to prevent the following situations:
The pension is called an Account Based Pension (ABP). Its features include:
- Third parties such as family members or friends of a deceased owner having an unacceptable degree of control in the business.
- A deceased owners estate could demand a pay out.
- It could be necessary to negotiate additional borrowing or face asset depletion to pay out a deceased owner.
- Lending institutions could seek repayment or renegotiation of loan facilities.
A Buy / Sell Agreement provides business continuation with a minimum of disruption by creating ready buyers and sellers at fair market value price.
The funding solution for each proprietor is calculated to ensure they are adequately compensated for the equity being disposed of to the remaining proprietors, as well as being provided with an additional amount to cover the transfer costs – Capital Gains Tax in particular is an important consideration.
A well prepared business risk insurance plan also considers the overall impact of the departure of a proprietor. In particular, most people have been required to give personal guarantees to providers of finance and business assets. These guarantees often mount up to encumber a substantial portion of their personal wealth. Such guarantees are typically not extinguished on death or departure and indeed the death or departure of a guarantor may be reason enough for calling in the guarantees.
The most common funding source is life insurance, with appropriate provisions for critical illness, income or business expense protection and total and permanent disability.