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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 disability occur.


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.


While it’s 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 whopping 80%1.


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 business.


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 out.


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 9471 0080.


*Hugh 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.

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