Business Succession Planning
What is business succession planning?
Business succession planning involves planning for the smooth continuation and success of a business despite personnel changes. A comprehensive business plan should cater for voluntary and involuntary personnel changes.
Some involuntary personnel changes are insurable and some are not. Examples of non insurable situations include:
- Loss of professional qualifications necessary for the position.
- Mental health determinations.
Business Succession Insurance
Our business succession planning advice focuses on planning for involuntary personnel changes. Our advice endeavours to maintain business profits in the event that a business owner and/or key staff member dies prematurely or is otherwise incapacitated (temporarily or permanently). One way to fund this is to use personal insurance (Life, Trauma and TPD insurance).
The key to business succession planning using insurance is to provide the right amount of money, for the right person, at the right time, with no nasty tax surprises.
Business succession insurance can be broken into three categories:
- Business revenue protection insurance (a type of key person insurance).
- Business asset protection insurance (a type of key person insurance).
- Business ownership protection insurance (funding of buy/sell agreements).
Who needs business succession insurance?
Businesses that need succession insurance include:
- Non husband and wife owned businesses.
- Businesses that have business debt.
- Business relying on a key person or persons to generate revenue.
Why have business succession insurance?
The easiest way to understand why business succession insurance is necessary is through hypothetical scenarios. For example:
- What would happen to your business if you lost your key salesperson or head foreman?
- If your business partner died, do you want to be in business with their executor/estate?
- What would you do if you have provided a personal guarantee for a business loan or lease, and you become injured and can no longer contribute to the business?
- How would your family maintain their lifestyle if you died?
Important considerations for business succession insurance
- Is the agreement sufficiently wide enough to incorporate all potential events .i.e. death, TPD and/or critical illness of a business owner or key person?
- Can the level of business succession insurance cover be updated?
- Differing equity/ownership stakes of the business owners.
- Different ages/health of business owners creating potential cross subsidisation.
- Different personal situations and personal priorities for each business owner. For example, different marital status (married or partnered with dependants versus single with no dependants, blended families, etc).
- To have all business owners in the same place at the same time.
- Ceilings on TPD and Trauma insurance payouts.
- Trauma insurance payout conditions not consistent with that of the key person and buy sell agreements.
- The interaction of a business asset and ownership protection insurance. A possible chicken and egg scenario.
- No forward underwriting with an increasing business valuation.
- Superannuation and benefit payout conditions.
- Superannuation and concessional contribution limits.
- ‘Own’ versus’ any’ occupation TPD.
- Unsuitable insurance ownership structure.
- Lack of insurance portability – the insured may not be able to take cover with them should the cover still be required for personal needs, but no longer required for key person or buy sell insurance.
- Unexpected tax consequences. Special care needs to be taken on the ownership structure of business succession insurance.
"Since engaging Chris Humphrey, I have benefited from his comprehensive financial, investment and tax knowledge. Chris and his team are always quick to respond to my queries and pro-active in updating me on any changes that may affect my financial situation. "
Dr Jason Stone