Business insurance

1. Business insurance

2. Overview • Risk management • Who is a key person ? • What is business succession planning ? • What role does your financial adviser play ?

3. Risk Management • Three worlds of risk • Business: Key person insurance - designed to protect the business against • shortfalls of revenue, loss of value and to ensure its ongoing viability. • Shareholder: Bussiness succesion planning(BSP) is about the shareholder, • not the business. It aims to provide certainty for the departing owner, as well • as the remaining business owners • Individual: Personal Risk management of issues, particularly identifying if • there is a shortfall of assets required to support beneficiaries

4. Risk Management 1. What business risks are present? Business Succession Expense/ Overheads Key-person 2. Are these risks to be retained, transferred or reduced Retain? Transfer? Reduce? 3. What does the strategy look like? Buy-Sell Sum to Insure Policy Ownership

5. Who is a key person ? Every business has key staff/managers/directors without whom the business would struggle, for example • key sales staff • key technical specialists • working directors • Other key persons can include: • key suppliers • silent partners providing capital / contacts

6. Impact of losing a key person • Loss of clients • Loss of goodwill and damaged credit rating • Personnel replacement and development costs • Reduction in business growth and development • Reduced profitability and business value

7. Key person protection • Term/TPD/Trauma cover on the lives of key people whose loss would cause the business to suffer • Compensation for loss of production and loss of revenue • Cost of finding and training suitable replacement • Can provide much needed buffer period to allow replacement to be found and trained

8. Tax treatment of key person protection Revenue purpose • premiums deductible • proceeds assessable income Capital purpose • premiums not deductible • proceeds not assessable as income (but CGT may apply) Purpose of cover can change over time - purpose at last renewal determines the tax treatment

9. Capital purposes • Pay off loans the key person had guaranteed • Pay off shareholder loans • Providing funds to pay creditors • Protect credit rating • Protect against loss of major supplier • Offset loss of goodwill

10. Revenue purposes • Cover lost revenue and profits • Cover expenses of replacing key person • Cover cost of hiring replacement • Compensate for loss of clients or contacts

11. Business succession planning • Departing / deceased owner secures a fair value on exiting • Remaining owner get the control he/she needs Business succession plan provides certainty and peace of mind for all parties

12. Buy/sell agreement trigger events Triggering events for the buy/sell agreement are typically insurable events – what are these? Events which are uninsurable should be considered by shareholders – what are these?

13. Buy/sell agreement: example XZY Pty Ltd 50% 50% Shareholder A Shareholder B

14. Buy/sell agreement: example XZY Pty Ltd 50% 50% Shareholder A (deceased) Shareholder B

15. Buy/sell agreement: example XZY Pty Ltd 50% 50% Shareholder A (deceased) Shareholder B A’s shares transferred to B pursuant to buy/sell agreement Insurance proceeds paid to A’s estate if (self-owned policy)

16. Funding alternatives Savings Borrowings Instalments Insurance • Self • Cross • Trust • Business • Super

17. What if the client is uninsurable? • Buy/sell agreement can still be effective • Take out insurance where available • Where insurance is unavailable, then in the event of the triggering event by uninsured owner • Buy/sell agreement provides mechanism for shares to be transferred • Surviving owner(s) purchase shares from departing owner or estate by instalments (to avoid putting the business in financial stress)

18. Role of financial adviser • The adviser manages the product selection, insurance application and policy ownership decisions • The adviser can co-ordinate the process, drive engagement both with yourself and other professionals • Accountant will determine the valuation method and any other tax implications • Solicitor will draft any agreements

19. Summary • Key person cover can be essential to ensure the ongoing viability of your business • A buy/sell agreement provides the departing owner with a fair exit value in relation to his/her share of the business, while providing the remaining owner with control over the business’s future direction. • A buy/sell agreement is a solution for dealing with fundamental events such as death, TPD and trauma and the resulting legal issues

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