Risk InsuranceBusiness Advisory

Business succession planning: Protecting what is important

15 November 2022
3 min read

16 November 2022

Not having the right insurance plan in place can leave you financially vulnerable. Unfortunately, many people don’t realise the importance of a business risk management strategy before it’s too late. Our team of specialist risk advisers provide service-driven insurance advice on how to reduce the financial risks presented to your business.

In this scenario, our Risk Insurance client provides telecommunications and digital solutions to businesses throughout Australia. The two founders own the business 50/50 through their holding entities and each has a key role to play in the business both day to day and strategically.

As a thriving business, they took it upon themselves to purchase the office where they ran the business and, as the business grew, they moved to larger premises but kept the other property. This strategy meant they now have a business property portfolio with significant equity.

The founders saw themselves as business partners, but not life partners. They always planned to exit the business one day, and that would include the business property portfolio.

Given the potential for significant equity growth in the properties as well as their planned aggressive business growth strategy, they were concerned how the surviving business partner would find the funds to pay out the deceased’s family for their shares should either of them pass away.

Working with the business owners, their lawyer and accountant, we were able to put a value on both the business and property portfolio separately. Further, in drafting the shareholders agreement, the lawyer made reference to a life insurance policy that would provide an initial capital payment and a formula for the valuation of the business and property portfolio as well as how any remaining funds above the life insurance would be paid out.

In this case, the lawyer recommended that the life insurance policies be self-owned by each of the lives insured and tied together by the shareholders with a “put” and a “call” option*.

Given the growth prospects of both the business and properties, we had each of the lives underwritten for three times the current values, so that the life insurance contracts could easily increase in value in the future in line with the growth of the assets they were protecting.

As a result, each of the business owners now have a shareholder’s agreement that provides clear guidance on how planned and unplanned exits are to occur. In the event of an unplanned exit, this includes how the succession will be funded and transacted.

We were engaged to provide the business and the shareholders with the strategic, underwriting and product placement advice for a Shareholder Succession personal Life insurance policy on each of the shareholders lives. 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.

*In simple terms call options give the holder of the contract the right to purchase the underlying asset, while put options give the holder the right to sell the underlying asset.