If you have some equity in a business you own with other people, protecting your business ownership is a must.
One way this can be done is by establishing a Buy Sell Agreement funded buy insurance.
💡 What are the benefits protecting your business ownership?
By using this strategy, you could:
- Enable the remaining owners to acquire your interests in the business in an orderly manner if you die or become disabled, and
- Ensure you (or your estate/dependents receive adequate financial compensation.
How does this protecting your business ownership strategy work?
If a business owner dies, in the absence of any specific arrangement, their interest Is likely to be:
- Distributed in accordance with their will (eg to their surviving spouse), or
- Otherwise controlled by their beneficiaries (eg if the interest is owned via a family trust).
As the new-part owner of the business, the spouse (or beneficiaries) would then be entitled to the same management and financial rights as the deceased owner.
But the remaining owners may not be happy admitting the deceased owner’s spouse (or beneficiaries) into the business and ownership disputes could arise.
The deceased owner’s spouse (or beneficiaries) might not have the necessary skills to assist in running the business, or even want to be involved.
⚠️ Furthermore, the remaining owners may not be able to raise enough money to buy the departing owner’s equity in the business, nor agree on the price.
Potential problems can also occur if a business owner becomes disabled and is unable to work in the business again.
To protect the business and ensure an orderly transfer of ownership, a Buy Sell Agreement should be considered as part of the broader succession planning process.
A Buy Sell agreement is a legal contract between business owners that usually comprises two components;
- A transfer agreement *that outlines what will happen to each owner’s business interest if certain events occur and how the interests will be valued, and
- A funding agreement that outlines how the money will be raised to finance the ownership transfer and who will receive it.
💰 There are a number of ways a Buy Sell agreement can be funded. For example, the remaining owners may be able to buy out the departing owner’s interests using their own capital or borrowed money.
However, when it comes to death and disability, insurance is usually considered the most cost-effective and efficient way to raise sufficient capital.
Note: While a Buy Sell agreement will be less important for businesses in which little equity is held, its still important that the owners of such businesses establish a broader succession plan.
More ways of protecting your business ownership
Protecting your income is essential if you’re self employed or run your business through a company or trust.
💰 How does the protecting your income strategy work?
As part of protecting your business ownership, if you are unable to work for an extended period due to illness or injury, how will you meet your mortgage repayments and other bills and expenses? Without a strategy for protecting your income, you could run down your savings very quickly and face financial difficulty.
Rather than putting your family’s lifestyle at risk, by taking out Income Protection insurance, you are also protecting your business ownership. You could receive a monthly benefit of up to 75% of your income to replace your lost earnings while you recover.
During this period, income protection insurance could ensure that business resources do not have to be used to fund your income while you are not contributing to the business. Further contributing to protecting your business ownership.
👀 You can read more on protecting your business ownership and protecting your income here
💡 If you need more information or help in protecting your business ownership and to implement this strategy for your business and wealth protection, contact us today on 08 7111 0022. or book a chat here
Arthur Panagis
Author, Founder, Wealth Coach and Financial Strategist
B.Bus (Accountant)
Grad Dip (Financial Planning)
Professional Certificate in Self Managed Super Funds
ASX Listed Equities Accreditation
Tax (financial) Advisor
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Disclaimer: This article is factual information only. It is not intended to imply any recommendation about any financial product(s) or to constitute tax advice. The information in the article is reliable at the time of distribution, but may not be complete or accurate in the future.
