Review for Accountants & Financial Planners
July, 2015

Business Succession: integrated elements

Two minute scenarios...

When a business owner dies or becomes disabled and can no longer work, there is both the business and the individual risk to consider.

Scenario One... David and Michael

Scenario: David and Michael have been in business for ten years. They have been reinvesting most of the profits over the years as the business has been in a strong growth phase.

What's the issue? Neither of them has been putting money into superannuation. There hasn't really been any funds left over. So their business is their retirement fund. If one of them died, how would they access those funds?

Solutions: The remaining partner may be able to borrow the money or ideally the partners have insurance in place to cover the equity buyout. Most clients find this to be a very cost effective solution. A supporting Buy Sell Agreement provides surety that the equity will transfer to the surviving business partner. Both parties (and their families) are covered.

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Scenario Two... the business itself...

Scenario: The business had taken out a $500,000 overdraft to fund a new factory.

What's the issue? David died a couple of months ago. The bank loan contract had a default clause whereby if one partner dies they can call in the loan. Unless Michael can come up with the funds the business may have to close. His retirement nest egg will disappear.

Solutions: The business could have taken out insurance policies on David and Michael to cover the bank debt. The Buy Sell Agreement could also have ensured those funds were used to pay down the loan. Michael could get on with running the business.

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Scenario Three... all of it

Scenario: Business went down hill (David was a key person!) and the bank called in the loan. The business has gone into liquidation.

What's the issue? Not only has Michael lost his future retirement funding, he (and David) had to sign joint and several personal guarantees when the business took out the overdraft. The bank can now sell either or both of Michael or David's homes.

Solutions: Again, insurance cover for debt would have benefited not only the business, but also protected the family homes.

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More information for clients

Please feel free to forward this insight on Buy Sell Agreements to your clients. Or if they would like to discuss how we can help them please call 03 8621 9000 or email with their details and we will contact them, obligation free.

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