Business Succession Insurance

Do You Run a Business? Want to Protect its Future? Tips for Finding the Right Business Succession Insurance Plan

Planning is key to the success of any business. While this may typically refer to planning for future growth or investment opportunities, it’s also vital to develop plans for business succession.

Think about what would happen if a business partner in your business were to die. What would happen to your business if the driving force of your company decided to move on or retire?

This is where business succession insurance can come to the rescue. Business succession insurance insures your plan for the smooth transition of ownership of your business if an owner happens to die or become permanently incapacitated. Taking out business succession insurance is a sensible course of action and is vital to the future survival of a business

What is Business Succession Planning?

When you’re occupied with the day to day activities of running a business, sometimes you can forget about the importance of planning ahead.

The basic premise behind business succession planning is setting up a course of action for the future, should one of the owners is no longer able to be a part of the business because they die, become disabled or suffer a critical illness. In far too many cases, the death of a key person results in the undoing of a previously successful business. Without any sort of succession plans or funding arrangements in place, this sort of scenario can quickly turn into a legal minefield and destroy the years of hard work you’ve put into building a business.

Business succession planning is designed to ensure a smooth transition of ownership and the future success of a business. It involves drawing up a plan to detail what will happen to the outgoing partner’s share of the business, including how the remaining owners will buy out the departing owner’s share. It avoids messy legal battles and disputes, leaving you free to get on with running and growing your business.

Business succession planning is crucial to a business’ survival and something that every business owner should take the time to work through.

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Who Needs Business Succession Insurance?

Business succession insurance can offer much-needed financial protection to a wide range of businesses. These include:

  • Businesses that are not owned by a husband and wife
  • Businesses that have debt that needs to be repaid
  • Businesses that rely on a key person or multiple key people to generate revenue

This covers a pretty broad spectrum of businesses, but the importance of this type of cover is abundantly clear. For example, say you’re in a partnership that runs a business and your business partner dies. Would your partner’s share of the business then be passed on to their estate? Would you want to be in business with their executor? If you hadn’t taken out business succession cover, this is a problem you may have to face.

Alternatively, would your business be able to survive financially if a key sales manager suffered an injury, became permanently disabled and was unable to return to work? Again, taking out business succession insurance can help protect your business from any resulting financial loss.

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What is the Importance of Buy/Sell Insurance?

A buy/sell insurance agreement is a written agreement entered into by the partners in a business. This legally binding agreement sets out the terms and conditions for the transfer of a departing partner’s share in a business to the remaining partners. This includes the financial obligations of each partner and can come into effect when another partner dies, becomes disabled or suffers a terminal illness.

It ensures that there is a plan for the business’ future already in place, and this sort of agreement is accompanied by a buy/sell life insurance policy for each business partner. Buy/sell insurance can guarantee a smooth journey forward for your business, plus it can ensure that there is adequate compensation for the departing partner or their estate.

Without a buy/sell insurance agreement in place, the death or disablement of a partner can cause a previously harmonious business environment to turn nasty very quickly. Costly and time consuming legal battles can then result, and it often means the demise of many previously successful businesses. This is why buy/sell insurance is so important.

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Key Person Insurance Checklist

If you’re considering taking out key person insurance for a member of your business, you’ll need to ascertain whether this is the right type of cover for you and exactly how much protection you need. In order to do this, consider the following:

  • The role the key person plays within the company.
  • Would you lose customers if the key person left the business?
  • How long would it take you to find, hire and train a replacement?
  • How much would it cost you to find, hire and train a replacement?
  • Would you experience a drop in production while training the new employee?
  • Would your credit rating be affected by the key employee’s departure?
  • Would you lose credibility or would your public reputation be affected if you were unable to meet outstanding orders?
  • Will you lose goodwill?
  • How will your ability to generate revenue be affected?
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Business Succession Insurance Considerations

When you’re shopping for business succession insurance there are a number of factors that you need to take into account. For starters, you’ll need to consider exactly how much cover you need and what you need it for. How much is the loss of a partner or key employee likely to cost your business? How much goodwill would you lose in such circumstances, and how long would it take you to find and train a suitable replacement? Do you want death cover only or do you want protection against TPD and trauma as well?

You also need to think about what you will use the proceeds of your insurance for. Whether you use your benefit for revenue protection or capital protection can have a big influence on the tax treatment of your policy, so keep this in mind when shopping for cover.

You’ll need to shop around to find an insurance provider you can trust. Look for an insurer with a long history and a reputation for reliability, plus make sure to compare policies at finder.com.au.

Of course, business insurance can often be a complex topic that many business owners simply don’t have the time to fully understand. With this in mind, it often makes good sense to enlist the services of an insurance broker to ensure you find the right cover for your business.

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Business Succession Insurance FAQs

Q. How important is it to plan for business succession?

  • A. This is a hugely important task for any business owner. Without a business succession plan in place, all the hard work you’ve put into building your business can be quickly done. Working out a plan in advance removes any legal issues and simply lets you concentrate on continuing to run your business.

Q. Do I need a written business succession agreement?

  • A. Yes. This will make the succession process much easier from a legal perspective and offers the stability and certainty your business needs to survive.

Q. How do I go about creating a business succession agreement?

  • A. The owners of the business will need to negotiate and agree upon trigger events for buying out a share of the business, what the business’ assets are valued at and the buy and sell obligations of each business owner. A funding plan can then be established to satisfy the financial obligations of the owners and then the necessary legal documents can be prepared.

Q. What should I do if I need help with my business insurance?

  • A. For assistance with any type of business insurance, enlist the services of a qualified insurance broker. A broker will be able to understand the needs of your business and then find suitable insurance solutions.

Business succession insurance is something that every business owner must consider. It ensures a smooth transition of ownership when a business owner dies, making it crucial for the future survival and success of any business. Make sure to compare your business succession options before deciding on the best insurance solutions for you.

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William Eve

Will is a personal finance writer for finder.com.au specialising in content on insurance. While he cannot give personal advice to clients, Will enjoys explaining the intricacies of different types of protective cover to help individuals and businesses find affordable cover that won't leave them underinsured.

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