Buy-Sell Insurance – What is it all about?
Another expression used for buy-sell insurance is a business will.
Owners of a business enter into a written agreement to plan just what will happen to their respective interest in the business should either die, become disabled or suffer a critical or terminal illness.
The agreement needs to cover off how the ‘exiting’ partner can sell their inerest in the business to the surviving partner and establish a mechanism to fund the transfer.
Why is it Needed?
Most businesses realise that they would suffer in the event of one of their key people becoming totally disbled, suffer a traumatic illnesses, injuries, or even pass away.
Problems may arise with the family of the deceased making demands for the business to be wound up, paid out their share or loans to be repaid. They may even insist on direct control over daily operationsof the business without the necessary skill set.
The estate may be forced into a ‘fire sale’ of their business interest.
If the ill business owner suffers a trauma, much uncertainty can exist over their ability to return to work leaving a heavy burden on the remaining owner, who still needs to profit share with their sick partner.
So what products are available to help out?
Death & Total & Permanent Disability cover are usually easy to insure against and can be included in a buy-sell mechanism.
Trauma insurance is also available but does raise some more complex issues.
How do you work out how much to Insure for?
Each owner needs to vale their share of the business. I.e. A $500k business with 2 owners is likely to be $250k each, assuming equal partnership.
Current Market Value of the business is the usual way for a business to be valued and the level of cover is likely to need an annual review. Not considering appropriate values and a trigger event occuring can cause hardship in working conditions within the business, a deterioration of living standards, decrease in value or even forced closure of the business.
Other methods used to value the business may include an Agreed formula method, usually in consultation with an accountant. Any formula chosen needs to be clearly articulated in the written buy-sell agreement.
Alternately, the owners may choose an Agreed Value for the business that is justifiable, regularly reviewed & updated & arrived at in conjunction with their accountant.
Otherwise, an independant arbitrator can be utilised to arrive at an acceptable market valuation.
Whichever method is chosen, all parties should be in agreeance and advice obtained from appropriate sources for the most suitable method to be used.
