Buy / Sell Insurance

As a business owners, your primary wealth vehicle is the company you build. Partnerships and shareholders have a plan in mind to build the business and eventually exit, at a time which suits them. Like all things in business, nothing is certain. We work with Small and Medium Enterprises, to plan for significant life events which force owners to prematurely exit a business. Do the remaining shareholders have sufficient capital to fund a buyout? How will the business operate if the beneficiaries of an estate inherit ownership of the business? These questions are just some of the things to consider, when reviewing or drafting a shareholder agreement.

Key-Person Cover

In any business large or small, there are key personnel who drive a large portion of the business value. Considering the effect on the business valuation, if something were to happen to these individuals, is a core part of protecting your business. You would not hesitate to insure a vehicle ($25,000), so what impact would the death or disablement of a key employee have on your business value. We work with business owners and directors to evaluate your business and identify key risk areas, which require protection.

Buy / Sell Agreement

Structuring an Buy Sell agreement is an important part of any shareholders agreement. Identifying under what circumstances and when, shareholders will sell their ownership of the business. Examples include; on death, permanent disability, conviction of a crime, or reaching retirement age.

Buy / Sell insurance

Ownership valuations can be high, and often capital is not available to fund the purchase of the shares in a business. Insurance can assist in funding the cost of a pre-mature business exit.

Key-Person

The death or Disability of a key income driving employee or director can drastically effect a business. A cash injection can be required to fund replacing that key person, or drastically reducing debt, to assist in covering reduction in business revenue,

Buy/sell insurance — common questions

What is buy/sell insurance?

Buy/sell insurance funds the transfer of business ownership when an owner dies, becomes permanently disabled or suffers a serious illness. The policy pays a lump sum to the remaining owners so they can buy the departing owner's share, and the departing owner's family receives fair value in cash rather than a stake in a business they cannot run. It works alongside a buy/sell agreement, which sets out the terms.

What is a buy/sell agreement?

A buy/sell agreement is the legal document that obliges the remaining owners to buy, and the departing owner's estate to sell, on defined terms. Insurance funds it; the agreement makes it enforceable. Having one without the other is the common failure — an agreement with no funding leaves owners scrambling for capital, and insurance with no agreement leaves everyone arguing about price.

Do we really need it if we trust each other?

The arrangement is rarely tested between the original owners. It is tested between a surviving owner and the deceased owner's spouse — who may need the money, may have no interest in the business, and may not know what was agreed verbally years earlier. Trust between partners is exactly why the terms should be written down while everyone is well.

How is the value of a share worked out?

Usually by a valuation method written into the agreement — a multiple of earnings, a formula, or an independent valuation at the time. What matters is that the method is agreed in advance and that cover is reviewed as the business grows. Cover set at a valuation from five years ago is one of the most common problems we see.

Is buy/sell insurance tax deductible?

Generally no. Premiums for buy/sell cover are usually not deductible because the purpose is capital, not income protection, and proceeds are generally not assessable income. The tax treatment depends on how the policy is owned and structured, and getting the ownership structure wrong can create a CGT problem — which is why this is worth advice rather than a form.

What is the difference between buy/sell and key person insurance?

Buy/sell cover funds a change of ownership. Key person cover compensates the business itself for the loss of someone whose skills, relationships or knowledge drive revenue — paying for recruitment, lost profit, or reassuring lenders. Many businesses need both, and they are structured and owned differently.

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