If you own a business in partnership, there is always the risk of you or your business partner being unable to work due to injury, serious illness or death. Buy / Sell Insurance can be vital to your business succession plan as it may answer the question: “Would I be able to afford to buy out my partner’s share of the business if they passed away or were not able to work in the business?”
A Buy / Sell Insurance policy can provide a lump sum to be paid out to the remaining owner(s), their spouse or their estate in the event of death or if they are leaving the business due to a serious illness or injury. This can ensure the business can continue to operate (with existing partners) and that their spouse or estate is compensated for their share and rights to the business.
The purchase of the departing owner’s share of the business can then be funded either fully or partially by the proceeds from the buy / sell insurance policy.
Buy / Sell Insurance can help reduce the risk of:
– An owner or their estate commencing legal action over a payout figure, as it will have already been determined by the buy / sell arrangement.
– The departing owner’s estate selling their share of the business to an unsuitable third party;
– Without working in the business, the departing owner’s spouse taking claim over the business profits;
– A departing owner’s spouse deciding (against the wishes of the continuing owners) to act as a partner of the business as opposed to taking the payout;
– The remaining owners having to sell the business in order to pay out the departing owner, spouse or estate.
Different types of ownership structure
You should consider the three types of insurances available – Life insurance, Total and Permanent Disability insurance, and Trauma insurance. After determining the appropriate policies with your financial advisor, you must then decide on the appropriate structure for ownership; these can include:
1. Self-ownership
The person insured is the policy owner. This is a simple structure where the insured is in control of their own policy, even after they leave the business.
2. Cross-ownership
in this situation, business owners take out insurance on each other. The policy can then change with any changes in business ownership.
3. Insurance trust
the trust owns the policies on behalf of all business owners, and the policy ownership is not impacted when business ownership changes.
4. Business entity
the trading entity owns the policies on the business owners’ lives. The business entity can then use the insurance proceeds to buy back the departing owner’s share.
How we can help
It is important to get expert advice from Endorphin Wealth Management regarding business succession planning and as to which policies and structure would best suit you and your business. When carefully considered, Buy / Sell Insurance can be a useful asset which allows you to focus on everyday management and growth of the business rather than worrying about the future should one partner be forced to step down.
For an obligation free discussion, call us on 03 9190 8964, or email us at advice@endorphinwealth.com.au.
