How life insurance can act like a Will for your business

Risk Insurance

12 October 2020

If you’re a business owner that does not own 100% of the equity in their business and shares it with other people, you should consider establishing a Buy/Sell agreement funded by life insurance to provide clarity and certainty regarding the future ownership and operation of your business.

A Buy/Sell agreement funded by life insurance can assist with the transfer of equity and/or control if something should happen to you or one of the other business owners, essentially acting like a Will for your business. It can help address two key issues:

  • The legal transfer of control and ownership of your business.

  • The way that the transfer of your business will be funded.

It will also help ensure the departing owner’s family receives a fair value for their share of the company.

Any business structured through a partnership, company or trust should consider a Buy/Sell agreement. Without an agreement in place, surviving owners may have to negotiate with the spouse or other beneficiaries to buy out their share of the business.

Funds may not be available, the value of the business may be under contention, and beneficiaries may be forced to take whatever is on offer. In other cases, the beneficiaries may choose to take an active role in the business, regardless of whether you want them to or they are qualified to.

A Buy/Sell agreement will usually specify:

  • Trigger events – situations in which the contract is to be “triggered. Usually on the death, crisis event or total and permanent disablement of a business owner.

  • Call options – the right of one proprietor to purchase another’s equity under specified circumstances.

  • Put options – the right of one proprietor to force the other(s) to purchase their equity in the business under specified circumstances.

  • Agreed price and/or valuation method - the price at which the equity will be sold and how it is determined.

The amount of business ownership insurance you will need to fund the Buy/Sell agreement will vary depending on your business and your circumstances. Generally, this is based off a valuation method or an agreed price.

Navigating this process can be complex and you should seek the guidance of an accountant, solicitor and a specialist risk insurance adviser to help you. For more information or assistance with this process, please speak to your adviser or contact the Findex Risk Insurance team.