Risk management Who is a key person ? What is business succession planning ? What role does your financial adviser play ? Overview
Risk Management Three worlds of risk Business: Key person insurance - designed to protect the business against shortfalls of revenue, loss of value and to ensure its ongoing viability. Shareholder: Bussiness succesion planning(BSP) is about the shareholder, not the business. It aims to provide certainty for the departing owner, as well as the remaining business owners Individual: Personal Risk management of issues, particularly identifying if there is a shortfall of assets required to support beneficiaries
Risk Management 1. What business risks are present? 2. Are these risks to be retained, transferred or reduced 3. What does the strategy look like? Key-person Business Succession Expense/ Overheads Retain? Transfer? Reduce? Buy-Sell Sum to Insure Policy Ownership
Every business has key staff/managers/directors without whom the business would struggle, for example key sales staff key technical specialists working directors Other key persons can include: key suppliers silent partners providing capital / contacts Who is a key person ?
Impact of losing a key person Loss of clients Loss of goodwill and damaged credit rating Personnel replacement and development costs Reduction in business growth and development Reduced profitability and business value
Key person protection Term/TPD/Trauma cover on the lives of key people whose loss would cause the business to suffer Compensation for loss of production and loss of revenue Cost of finding and training suitable replacement Can provide much needed buffer period to allow replacement to be found and trained
Tax treatment of key person protection Revenue purpose premiums deductible proceeds assessable income Capital purpose premiums not deductible proceeds not assessable as income (but CGT may apply) Purpose of cover can change over time - purpose at last renewal determines the tax treatment
Capital purposes Pay off loans the key person had guaranteed Pay off shareholder loans Providing funds to pay creditors Protect credit rating Protect against loss of major supplier Offset loss of goodwill
Revenue purposes Cover lost revenue and profits Cover expenses of replacing key person Cover cost of hiring replacement Compensate for loss of clients or contacts
Business succession planning Departing / deceased owner secures a fair value on exiting Remaining owner get the control he/she needs Business succession plan provides certainty and peace of mind for all parties
Buy/sell agreement trigger events Triggering events for the buy/sell agreement are typically insurable events – what are these? Events which are uninsurable should be considered by shareholders – what are these?
Buy/sell agreement: example XZY Pty Ltd Shareholder A Shareholder B 50%
Buy/sell agreement: example XZY Pty Ltd Shareholder A (deceased) Shareholder B 50%
Buy/sell agreement: example XZY Pty Ltd Shareholder A (deceased) Shareholder B 50% Insurance proceeds paid to A’s estate if (self-owned policy) A’s shares transferred to B pursuant to buy/sell agreement
What if the client is uninsurable? Buy/sell agreement can still be effective Take out insurance where available Where insurance is unavailable, then in the event of the triggering event by uninsured owner Buy/sell agreement provides mechanism for shares to be transferred Surviving owner(s) purchase shares from departing owner or estate by instalments (to avoid putting the business in financial stress)
The adviser manages the product selection, insurance application and policy ownership decisions The adviser can co-ordinate the process, drive engagement both with yourself and other professionals Accountant will determine the valuation method and any other tax implications Solicitor will draft any agreements Role of financial adviser
Summary Key person cover can be essential to ensure the ongoing viability of your business A buy/sell agreement provides the departing owner with a fair exit value in relation to his/her share of the business, while providing the remaining owner with control over the business’s future direction. A buy/sell agreement is a solution for dealing with fundamental events such as death, TPD and trauma and the resulting legal issues
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