Business insurance

Risk management

Who is a key person ?

What is business succession planning ?

What role does your financial adviser play ?

Overview

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

Risk Management1. What business risks

are present?

2. Are these risks to be retained,

transferred or reduced

3. What does the strategy look like?

Key-person Business

Succession

Expense/

Overheads

Retain?

Transfer?

Reduce?

Buy-Sell

Sum to

InsurePolicy

Ownership

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

Who is a key person ?

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

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

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

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

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

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

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?

Buy/sell agreement: example

XZY Pty Ltd

Shareholder A

Shareholder B

50% 50%

Buy/sell agreement: example

XZY Pty Ltd

Shareholder A

(deceased)

Shareholder B

50% 50%

Buy/sell agreement: example

XZY Pty Ltd

Shareholder A

(deceased)

Shareholder B

50% 50%

Insurance proceeds paid to A’s estate if (self-owned policy)

A’s shares transferred to B pursuant to buy/sell agreement

Funding alternatives Savings

Borrowings

Instalments

Insurance

Self

Cross

Trust

Business

Super

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)

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

Role of financial adviser

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

Disclaimer Important information

This presentation has been prepared by Charter Financial Planning Limited AFSL Licence Number 234665 to provide you with general information only. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. It is not intended that it be relied on by recipients for the purpose of making investment and/or business decisions. Before making an investment decision, you need to consider (with or without the assistance of an adviser) whether this information is appropriate to your needs, objectives and circumstances. You should obtain a copy of any relevant Product Disclosure Statement (PDS) before making a decision to invest in any financial product. Copies of PDS can be obtained from your adviser or by contacting us. Every effort has been made to ensure that the presentation is accurate, however it is not intended to be a complete description of the matters described. Neither AXA nor Charter gives any warranty as to the accuracy, reliability or completeness of information which is contained in this presentation. Except insofar as any liability under statute cannot be excluded, AXA Charter, it's employees, and authorised representatives do not accept any liability for any error or omission in this presentation or for any resulting loss or damage suffered by the recipient or any other person. This information is provided for persons in Australia only is not provided for the use of any person who is in any other country.