As a business owner, it’s your responsibility to do everything within your means to limit risk. And most importantly, to keep the business running smoothly. Business ownership protection is only as good as the ability to fund the transfer of the outgoing business owner’s equity. As well as, to protect business ownership for the partners left behind.

Firstly, ownership protection is for businesses with more than one owner. It assists in providing adequate funding to help the business survive.

Wealth Protection Case Study 1 – Protect your Business Ownership

Alex and Bill each owned 50% of the shares in a successful engineering business when Bill died suddenly.

Consequently, Bill’s shares were inherited by his wife Lynn via his Will. Therefore there was no Buy Sell agreement in place. Lynn is not obliged to sell the shares to Alex and Alex is not obliged to buy the shares from Lynn. Furthermore:

  • there was no agreed price or time frame for the transfer of Bill’s shares.
  • there was no insurance in place to enable Alex to buy the shares.
  • And Alex doesn’t have enough funds to buy out Lynn and doesn’t have the capacity to borrow the money.

To further complicate matters, Lynn is entitled to the same management rights and share of profits as her deceased husband. Meanwhile Alex is doing 100% of the work and only receiving 50% of the profits.

This outcome could have been avoided if Bill and Alex had sought financial and legal advice and executed a Buy Sell agreement. It can also be funded by insurance. By using this strategy, Lynn would have received the insurance proceeds in exchange for handing over her interest in the business to Alex².

As a result, Lynn would have been fully compensated, while Alex would have taken ownership of 100% of the business and received 100% of the profits.

Protecting your Business Ownership

Note: This case study highlights the importance of speaking to a financial adviser and solicitor about establishing a Buy Sell agreement funded by insurance. A financial adviser can also address a range of potential issues and identify other suitable protection strategies.  Tips and traps below.

 2 Finally, in this example, the insurance proceeds would be paid directly to Lynn. However, different payment arrangements may be preferable for businesses set up under certain ownership structures. Or the preferred approach recommended by your solicitor and / or accountant.

Wealth Protection Case Study 1 – Protect your Business Ownership cont

Tips and Traps

  • Most importantly, because a Buy Sell agreement affects your legal rights. It should always be prepared by a solicitor (preferably one that specializes in this area).
  • There are a number of ways to structure the ownership of insurance policies used to fund a Buy Sell agreement. Each ownership method will have different legal, tax and stamp duty implications. The ownership should be reviewed by the advising solicitor and registered tax agent.
  • It may be more cost-effective over the longer term if you pay level premiums, rather than stepped premiums that increase each year with age (see Strategy 6).
  • You should consider using insurance to protect your assets and business revenue (see Strategies 3 and 7).

MLC Protecting business owners Smart strategies guide”

If you need more information or help to implement this strategy for your wealth protection,
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