Business Succession Planning

Succession Planning – having a process in place that ensures the interests of a deceased shareholder/partner are dealt with in a manner that is equitable to the deceased estate and surviving shareholders/partners in a fair and tax effective manner.

How it works

A Buy/Sell requires the transfer of an interest in a business to another party. The surviving partners remain in control of business at a fair predetermined price The Departing principal (or family) then becomes free of business worries with no forced sale at a fair and predetermined price. There are many ways to find such an agreement but insurance is the most cost effective. Protection is put in place in the form of Life Insurance, Critical Illness or Total and Permanent Disability to provide funds for the succession plan.

The questions we help clients resolve are as follows:

• How long have you been in business?
• Do you have partners/shareholders?
• What would happen if your business partner died?
• Would his share of the business go to his wife?
• What is the value of the business?
• Could you afford to buy the shares from his/her estate?
• Would his estate expect to draw an income from the business?
• Would your business partner be able to pay your wife for your share of the business?

Key Person Insurance

Key Executive or Key Employee Life Insurance is insurance purchased by a business on the life of an owner or employee whose services contribute substantially to the success of the business. The Company is the owner and pays the premiums and therefore is the beneficiary of the policy. Because complete control of the policy vests with the company, the insurance may be considered simply as a company owned asset. Keyperson Employee Insurance has many uses but there are three main purposes:

The Protection of the Business – The cash received from an Insurance Policy on the death of the Key Employee will assist the company in the preservation, stability and continuation of the business, protecting other employees from losing their employment and will also assist in recruiting an outsider comparable to the deceased employee.

Finance – A special advantage of Key Employee Insurance is that it constitutes an emergency reserve, apart from all other assets, which is not subject to business fluctuations. It could also be used to stimulate confidence in creditors.

Provision for the Key Employee or his dependants – Key Employee Insurance may also be used to provide or

supplement a retirement benefit for the Key Employee or to finance a benefit in whole or in part to the widow or other dependants of the Key Employee on his or her death.

How to effect Key Employee Insurance

The employer takes out a policy on the employee’s life and pays the premium. If the Key Employee Insurance is effected by a registered company, the company should pass a resolution to effect the insurance and such resolution should contain the necessary details regarding the insurance policy and the purpose for which the policy has been taken out.

The Types of Cover

The Types of cover

Three major Lump Sum covers should be considered:

1. Term Life Insurance
2. Total & Permanent Disability Insurance
3. Trauma Cover Insurance

 The following are some examples of reasons for Key Employee Insurance:

• To offset the loss of a Key Employee’s services.
• To offset the loss of any unfinished business incurred by his or her death.
• To offset the loss of clientele attracted to the firm by his or her personality and ability.
• To offset the loss of employee unity and working harmony which is held by his or her good management and understanding.
• To offset the loss of future expansion of the firm.
• To offset the loss from other stabilising and profitable efforts on his or her part.
• To offest the need to cover loss in credit standing of the corporation for example: repay corporate loans which have been extended because of the Key Employee’s abilities.
• To cover the cost of seeking and training a Key Employee replacement.
• To make provision for this Key Employee and to protect his widow and other dependants.
• To insure the human life assets of the business, in order that there is continuity and the ability to repay debts in accordance with the law.