…benefits of funding Buy-Sell Agreements
Business succession funding secures the financial certainty of the parties who are dependant on your interest in a business. In other articles written we have challenged readers about the financial well-being of their family and loved ones if they are unexpectedly deprived of their continuing earning capacity (either because of being rendered permanently disabled, or even more extremely, dying). The other stakeholders in your business are also important to consider.
Business succession funding: and your family
The challenge in this situation is to imagine the event occurring on your way home tonight: what position will they be in? How will they cope with the emotional – and the financial – trauma of the event? Even if your asset position is sound, is the access to liquid assets such that they won’t be having to ‘beg, borrow or steal’ for a period of time to survive?
Business succession funding: and stakeholders
Now to complicate the above challenge, what if you are in a business relationship with another family (related to you or otherwise); and that business has borrowings, perhaps from your family as well as from a Bank; debts to settle – and survive the transition from you/ your business partner being removed from the business in the circumstances above. This adds the financial burden of the business, the potential difficult relationship between the family survivor and the surviving business partner – and some potentially serious business continuation questions to be answered.
The desired outcome needs to be negotiated between the partners in the business – and often that outcome is that the surviving family continues in the business under their absolute control; with the family of the disabled/ deceased partner having been ‘bought out’. How do you fund that buy-out (particularly if simultaneously, a financier needs to be paid out in part at least, if not in full)?
There are a few solutions available, but when timing is critical business succession funding through ‘buy-sell insurance cover’ is cost effective in most cases. Buy-Sell insurance is cover taken out over the lives of the principals of the business, to fund a significant portion of – if not the entire – settlement prescribed in the agreement (which may include loan repayment arrangements).
This is an exercise that usually requires some negotiation between the business partners, the funding bank, the legal adviser to the business, the advising accountant and your financial planner.
Continuum Financial Planners Pty Ltd has a wealth of experience in advising business partners in this type of arrangement: and we have published a number of articles on the subject. For more information, use the Search tool on our website and look for ‘buy-sell’ or ‘business succession’; and Contact Us for an obligation-free appointment to discuss possible strategies for your business. We will liaise with your legal adviser and your accountant to get an outcome in the best interest of your business.