A large number of SME business owners overlook the importance of having a business will. If a business partner dies, the impacts can be huge. Immediate effects will be felt in regards to the day to day running and continued success of the business, and quite often because of the uncertainty and lack of planning for this type of event, the outcomes for both the remaining shareholder/s and deceased estate can be catastrophic.
Insurance is often used as a funding mechanism, to purchase a partners equity in a business, should they die prematurely or become totally and permanently disabled. In consultation with a clients accountant, lawyer and risk advisor, the ownership on any share purchase insurance policies, should be vigorously discussed, to ensure that in the event of making a claim, the correct process is in place, and the funds are paid to the correct entity. This is usually documented in a Buy/Sell Agreement.
When meeting SME clients who have been referred to me, I am often astounded that their insurance policies in place, for the purpose of Share Purchase agreements, are not documented correctly, and are often lumped together with other sums insured, which have a completely different purpose. Not only does this cause ‘grey’ areas for all concerned in the event of a claim, it also causes uncertainty as to whether premiums can be tax deductible, and whether proceeds at claim time are assessable.
Another area of concern, is that business owners often don’t make time to review existing policies, and as a consequence the levels of sums insured, might not reflect the true value of their business. A policy that has been put in place for a Share Purchase agreement, will not be able to fulfil its purpose, if the value of the business has changed.
Insurance is one of the most cost effective funding options for buy-sell agreements as there is an immediate (in the event of death) funds available. This eliminates the surviving partner/s having to raise capital, to purchase the shares from the deceased persons estate. Annual premiums for these insurance covers, is significantly lower than the cost of repaying the principle and interest on a loan.
If you are a business owner, you will have worked hard to achieve your goals to ensure the ongoing success of your company. It is highly probable that your business will have become one of your most valuable assets. It is important to understand what is in place, and highlight any areas of concern before an event occurs, which could potentially not only destroy your business, but you and your families livelihood.
If you have not reviewed your business risk insurances recently, or are uncertain the levels of cover are correct, I would be happy to discuss this with you.