Can Your Business Survive Losing One Hand?

By Craig Boss

Synergy occurs when all the cogs in your business function together, turning in sync to drive your success forward. Each cog complements the other and works together to ensure the business runs successfully.

The most important cog in your business’ machine is You, the owner – the keeper of the vision, the one who sets the values, the client service model, and service experience. You are where the heart of your company beats.  Many companies have more than one owner, operating well as business partners, and together bring a broader suite of skills and dimensions to the business.

So, let me ask you this. What if, suddenly, you or one of your partners’, ‘a primary cog’, was removed from your machine? What if the replacement cog didn’t fit properly? What if a replacement couldn’t be found? What if the new cog didn’t have the necessary properties to do the job?  The cogs now begin to rotate out of sync and, worse yet, in different directions. Your machine stalls or even grinds to a halt.

This is very common in business and a key risk that cannot be ignored.

To put this into context, data from the Australian Prudential regulation Authority (APRA) indicates that, between the period of 1 July 2015 to 30 June 2016 at least $8.2 billion in net policy payments were paid out by life insurers. That is an astronomical figure and a reflection of how many Australians incur events that warrant an insurance claim.

Now, think about your own business. It is a realistic possibility that you or one of your partners may die or suffer significant illness or injury. Your partner and their estate still own a part of your business and are entitled to have someone step in as a replacement. This could be a spouse or child of your partner; someone who might not share your vision or, potentially, someone who may oppose it.

But it doesn’t have to be this way. What if I said that there is a solution. That, should your partner be unable to be a part of your business, there would be funds available to buy your partner’s equity, giving them and yourself peace of mind. A solution that ensures that your departing partner will receive fair compensation and your business’ machine then continues to run smoothly, with minimal disruption or loss. This is what a business protection plan achieves, a buy/see mechanism that leaves all parties involved with no ambiguity of what comes next.

What exactly is a business protection plan? It is a legal contract entered between business partners that allows the buyout of the other partner’s equity should specific, unforeseen exit events occur encompassing death, serious illness, or long-term disability. The contract obligates the exiting partner or their estate to sell their equity, thereby allowing a smooth transition of the business. The contract is backed by an insurance policy that provides funds to purchase the equity from the affected partner or their estate. This solves a multitude of problems that can arise:

  • For the partner/s that remain in the business, it allows a clear succession plan and retention of control;
  • For the partner/s that suffer the event, it promises fair compensation for their equity in a timely manner;
  • The insurance payout can also be used to provide ongoing medical care and can continue to sustain the departing partner’s life style without having to deplete personal savings;
  • It doesn’t require the business or remaining partner/s to maintain high cash reserves to fund the agreement and/or to borrow to fund the buyout;
  • It can be tax effective as, under certain circumstances, there may be a CGT liability;
  • And, most importantly, your business will continue to run according to your own outlook and philosophy without the potential for external interference.

You may well ask if there any problems or pitfalls, and how you get such an plan in place and avoid them?

  • The wording of the buy/sell agreement needs to be concise and accurate to prevent any questions about the nature of the agreement and what the involved parties are entitled to. A lawyer with expertise in this field is essential.
  • The business needs to regularly re-evaluate their structure and value to ensure it is current and a true reflection of the intention of the agreement. The insurance policies need to be reviewed to reflect this.
  • The nature of the contract can be complex when trusts, other companies, or other third parties are involved.

A business protection plan is a convenient, efficient, and guaranteed solution for business owners to preserve the continuity of your business in what can be the most uncertain and difficult of times, giving all parties involved confidence that their own interests are protected and represented in a fair manner.

At Core Private Wealth, we have the expertise, experience, and a defined process to put a business protection plan in place for your business. We co-ordinate all aspects and liaise with all parties, accountants and lawyers included, to ensure that your business protection plan is enacted in a smooth and efficient manner.

Call our wealth protection adviser, Craig Boss, for an initial discussion about protecting your business.