• Keyman Insurance

A major consideration and expense(s) for any business can be their insurance policies.

Some insurance policies such as workers compensation and public liability are legally compulsory while it is up to employers to make choices about insuring physical assets such as cars, buildings and equipment.

However, key person cover on the business owners and other key individuals in the event of  disability or death is often neglected.  Whilst individually the owners may hold  personal insurance contracts these are owned by the individual and do not  protect the business. This can be a serious oversight as there can be long term, costly and disruptive issues in the absence of a key person.

A strategy to protect all owners is to implement a Buy Sell agreement. This legally binding contract comprises two components:

Disposal mechanism

Buy/Sell Agreement
Sometimes called a “Business Will”, a Buy/Sell Agreement is a legal contract for business owners that states what will happen should a partner leave the business due to death or disability which usually contains a valuation method for the business.

Funding mechanism

Insurance
A funding mechanism is needed to make a Buy/Sell Agreement effective as possible. Insurance can be a
convenient means to fund the agreement without incurring a large financial burden.

= Business succesion agreements

Case Study: Protect your business ownership through a Buy/Sell agreement

Suitable for: People with equity in a business they own with other people

Key Benefits:

  1. help ensure orderly business succession if an owner is disabled or passes away
  2. provides funds to compensate beneficiaries for the transfer of equity in the business to remaining owners in the event of disability or death

Geoff and Jack each owned 50% of shares in a successful engineering business when Geoff died suddenly. Neither Geoff nor Jack’s wives have the skillset or desire to work in the business.
Geoff’s shares were inherited by his wife Jane via his will and, because there was no Buy/Sell agreement in place, Jane is not obliged to sell the shares to Jack and Jack is not obliged to buy the shares from Jane. Furthermore:

  • there was no agreed valuation or timeframes for the transfer of Geoff’s shares
  • there was no insurance in place to enable Jack to buy the shares
  • Jack does not have enough money to buy out Jane and the bank won’t loan him additional funds.

To further complicate matters, Jane is entitled to the same management rights and share of profits as Geoff.  In addition Jane does not want to be part of the business as she does not have the required skills or experience and just ‘wants to move on with her life’.

This outcome could have been avoided if Geoff and Jack implemented a Buy/Sell agreement that was funded by an insurance policy.  By using this strategy contractually Jane would have received the insurance proceeds in exchange for transferring business ownership to Jack.