Review for Accountants & Financial Planners
June, 2017

Valuing the business...

Two minute scenarios...

When business owners put a Buy Sell Agreement in place they need to consider how to value the business today, for insurance purposes, as well as when the exit occurs, in case a shortfall is payable.

Scenario One... James, David & Julia

Scenario: James, David and Julia have been in business together for 10 years and their Adviser has approached them to organise a business succession plan for an involuntary exit.

What's the issue? Part of the planning involves agreeing how they wil value the business at the time the partner exits.

Solution: Most clients include two options. The first option allows for the partners to agree annually on a valuation method, or if they don't agree, then it will be the current market value as determined by an independent valuer.

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Scenario Two... So how much insurance do we need?

Scenario: One often-used funding option to help pay out the exiting partner, or their estate, is insurance. The partners are in discussion with their Adviser around how much insurance they should have to cover their equity value (and possibly CGT) in the event of a death or TPD.

What's the issue? The clients are putting insurance in place based on today's business value, not the future value when one of them exits. Most clients get their accountants involved at this point, however it must be remembered it will also be a function of what the underwriters can approve.

Solution: A business value can change over time so it's important to review this anually with the clients to ensure they have enough cover in place.

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Scenario Three... not enough

Scenario: The three partners took out $1.3m each to cover equity and CGT. The business value has doubled since their last review but David has since been diagnosed with a chronic illness.

What's the issue? While James and Julia can increase their cover, the amount of insurance David has is now far less than his equity value.

Solution: The Buy Sell Agreement can be drafted so that if there is a gap between the equity value at the time of the exit (as documented in the Buy Sell Agreement) and the insurance received, the remaining partners pay the difference over time. Forward underwriting would have been very useful in this scenario.

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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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