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You must not act on anything that appears to be a recommendation without considering your personal needs, circumstances and objectives.
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Monday, September 10, 2012
Protecting your bread and butter - Buy/Sell
If you own your own
business, chances are it’s your livelihood. But what if something happened to
you or your partner and you were unable to go on running your business?
Having a buy-sell
agreement in place can be one of the best ways for small and medium business
owners to protect their livelihood against death, disability or trauma.
A buy-sell agreement is
a legally binding contract between business partners, which facilitates the
sale of business ownership when certain ‘trigger events’ like death and
While the purchase can
be funded personally, it is also commonly done through insurance, which can
provide ready capital and is often more cost-effective.
But what are the chances?
It can take years of
hard work to build up a successful business, however all this can be quickly
undone if you or your business partner die or suffer a serious illness or disability.
understandably not something you want to think about, unfortunately these
events are more common than you might think.
For two business partners currently aged 45,
there is a 55% chance of death, total and permanent disability or trauma occurring before age
65. While for three business partners
that number rises to 70% - for four business partners that number is a
Sadly, the more partners
you have, the more likelihood there is of a misfortune occurring to one of you.
However, having a buy-sell agreement in place can protect the equity in your
Using insurance to fund the agreement
There are many
advantages to using insurance to fund a buy-sell agreement.
First, it can help to protect
your equity in the business if you suffer from accident, illness or death, as
you (or your estate) aren’t forced to try and sell your share of the business
in a difficult and stressful time.
“Stressed sale” could
lead you to sell your share of the business for less than it’s worth, or worse
still, not be able to sell it at all.
Equally, it also
protects the other business partners from having to work with your estate or an unwanted replacement business partner,
your executor, or from having to suddenly come up with funds to pay you
But how exactly does a buy-sell agreement
through insurance work?
Basically, partners sign
a legally binding agreement enabling the sale and purchase of business equity
in the event of death, disability or trauma.
Each partner also takes
out an insurance policy, with the agreement stipulating that if a trigger event
occurs, the funds received from the insurance policy will be used to payout
their share in the business.
This means you, or your estate,
would receive the payment, while the remaining partners would receive your shares.
Are there any other options?
If you do not have a buy-sell
agreement in place and something happens to you or your partner, the business may
be forced to take one of the below options -
consider the questions raised and how ideal these would be for YOUR business:
Buy-out the share holding: Do you have enough equity in
your business to do this at short notice? How will you determine the value?
Partner’s estate maintains share holding: Are you
comfortable with your partner’s estate as a business partner?
Sell the share holding: Would the partner’s estate
receive a good price for their equity? Would the remaining partners get the
right business partner?
Borrow funds to buy the share holding: Would
lenders still lend money despite the loss of a key person? Would private equity
be looking for a premium, making it more expensive?
In many cases, having a buy-sell
agreement via insurance should be considered as a sensible way to protect the
interests of all partners. However all businesses are unique so it’s important
to seek help from qualified professionals in order to
find the right solution for your business.
For more information call Hugh
Kilpatrick* from RIadvice-RetireInvest on 03
Kilpatrick is an Authorised Representative of RI Advice Group Pty Limited (ABN
23 001 774 125), Australian Financial Services Licence 238429. This editorial
does not consider your personal circumstances and is general advice only. You
should not act on the information provided without first obtaining professional
financial advice specific to your circumstances.
1 Australian Bureau of
Statistics, 2005 Australian Life Table.