The Brief for Accountants & Financial Planners
July 2018

The "Business Will" - a succession plan

Two minute scenarios...

The grief around a long-term business partner dying can be difficult enough to deal with without the added stress of the financial impact for all concerned. What would be in your "Business Will"?


Where will the money come from?

Scenario: Andrew was one of four partners. When he died, his wife Sophie asked the remaining partners if they would buy out her inherited share as she preferred to invest in an annuity that would generate a consistent income stream.

What's the issue? The partners were finding it difficult to come up with the $1 million that Andrew's share was worth. With one of their key people no longer involved the bank was not keen to lend it to them.

Solution: The partners could have implemented an insurance funding solution as part of a business succession plan. For the cost of annual premiums, the business partners and the deceased's family would have been in a more secure position.

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Some but not enough. Now what?

Scenario: The bank said they could only lend them $250,000.

What's the issue? Sophie has received the $250,000 and transferred a quarter of Andrew's equity share. However, she is not generating enough income from the $250,000 annuity. She wants a payout of the balance over time but does not have the voting power to ensure that happens.

Solution: If the partners had a legal agreement in place to complement the insurance funding solution they could have been obliged to pay Sophie the remaining equity out of profits, in a timely manner.

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The key person...

Scenario: Andrew had been the business development "front person", responsible not only for the growth of the business but for maintaining key relationships.

What's the issue? The business needed to replace Andrew with someone who had good technical skills as well as excellent business development skills. Replacing him was going to be expensive.

Solution:. A good business succession plan can cater for the replacement of a key person with insurance. This can help the business get back on its feet, and help safeguard the owners' profit and equity, including Sophie's.

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