16 November 2022

Unexpected events, such as the loss of key staff, can impact your ability to run your business. Risk insurance coverage is one of the best ways to reduce impact on your company.

Our example of Risk Insurance clients were the managing director and production manager for an electrical manufacturing firm, who had been working in a business for over 15 years. They were also brothers.

The business itself was quite successful and with each of them playing a key role, it was natural that when the business owner was ready to retire they provided these brothers with the opportunity to purchase the business.

However, neither party had access to the capital required to purchase the business outright.

While a purchase price and transition terms were agreed on, there remained the issue of how each brother and future business owner would fund their acquisition of equity.

With the brothers being able to access some capital under a loan agreement from their parents, the vendor agreed to provide short-term working capital under a separate loan agreement with vendor terms to be repaid over a four-year period for the shares in the company.

This presented each brother, who owned their shares through their relevant holding entity, with some interesting problems now as business owners;

1. They each were pivotal in their role to the business, and the business would suffer financial impacts if they were unable to work.

2. Each of their family trusts owed a significant sum to their parents.

3. Each of their family trusts owed a significant short-term loan to the vendor (in their personal name).

4. The business itself had a significant vendor debt.

5. In the event of premature death or disability, each brother wanted their surviving family to exit the business leaving it to be run and controlled by the surviving brother.

We were engaged by the brothers, the vendor, and their respective lawyers and accountants to provide a solution to each of the risks, as ultimately these risks affected all of them.

A Key Person revenue policy was placed on each of the brother’s lives to provide revenue protection to the business in the event one or both of them passed away prematurely, became totally and permanently disabled (TPD) or suffered a significant health event. This would provide the business with cash to replace or re-hire and keep trading.

Both family trusts and the business each took out a 'Key Person' capital policy for Life and TPD on the natural lives so that that the debt obligations to their parents and the vendor could be met

And lastly, now that “value” had been created, a Shareholder Succession personal Life and TPD policy on the natural lives was established to provide funding for the purchase and transfer of the shares the brothers owned in the business (though their holding entity), should a trigger event occur.

And of course, through working with the clients and lawyers, all relevant documentation was drawn up to ensure that legally, everything we had put in place would be enacted should a trigger event occur.

To find out if you need a Business Protection strategy, download our checklist.

If you have any questions or need guidance, please contact us and a member of the Risk Insurance team will be in touch.