Why Insurance Is Critical To Great Business Succession Planning
Updated: Aug 20
Last month we covered all the nitty-gritty of business succession planning and why it is important for your business – small, medium or large. This month we explore (how and) why insurance is a crucial component of business succession planning.
To summarise, business succession planning is a formal process that helps you minimise disruptions to your business. It covers strategies for an orderly and organised handover of your business from one owner or manager to another when the situation calls for it. (Read our previous blog post for more details.)
So, how does insurance figure into the equation?
Insurance is a popular strategy that can be used to extend and reinforce your business succession plan.
The type and scope of your insurance cover becomes more and more critical as your business grows and business activities expand - you employ more people, outsource work, acquire assets, and further your products and services offerings. Your insurance cover should help you protect your business and ensure its continuity as it grows.
Here are three insurances that you may need while putting together a solid business succession plan:
Key person insurance
While your business might own significant material assets – from state-of-the-art equipment to a large inventory – it is oftentimes in fact the people behind your operations who are your key assets. It is, therefore, essential to protect your business from any risk posed from their untimely exit (such as due to death, TPD or critical illness.)
Such a loss could have a significant impact on your business in terms of the loss of knowledge, skills, and/or proprietary or strategic information that these people may possess. This type of loss can threaten the continuity, survival, profitability, and avenues for growth for your business.
Key person insurance is a form of life insurance for these key assets – employees or persons – that in turn also protects your business. Depending on your operations, you can identify the key persons that are important to your business and go from there. This could be a line manager, sales executive or the director of the company.
Buy-sell agreements are applicable when multiple owners or partners are involved in a business. In such a scenario, it is prudent to have a process in place to manage the exit(s) or addition(s) of new partners or owners.
A buy-sell agreement creates a structure for the continuing owners or partners to purchase the departing owner’s or partner’s interest in the business when a certain event occurs (such as death, TPD or critical illness.) This is usually done by means of put and call options specified in the agreement.
The buy-sell agreement can work in either of the two ways detailed below:
by exercising a call option, the continuing owners/partners compel the one departing to sell their interests to the continuing owners/partners.
by exercising a put option, the departing owner/partner compels the continuing owners/partners to purchase their interests.
Insurance is the critical second element of this equation ensuring there is sufficient capital available to fund the sale of equity should such an event occur.
Business expenses insurance
Business expense insurance can be a lifeline in helping your business stay afloat when circumstances change and you are no longer able to pay the bills. The insurance kicks in if and when you are unable to work due to an illness or injury.
Business expense insurance is very similar to income protection insurance. The main point of difference is that while income protection covers you for loss of income, business expenses insurance pays for fixed business expenses. This may be particularly useful for small or medium-sized businesses with higher fixed costs when the drop in revenue resulting from the absence of the owner means there is insufficient income to cover the operating expenses.
The payouts include expenses for rent, utility bills, employee salaries and other fixed expenses. This means that the bills continue to be paid without the owner having to dip into their personal savings or increase their debt while they are recovering.
Business planning with Oakmont
We understand that the operational demands of running a business can be all-consuming. At the same time, we know that it is vital that business leaders take the time needed to assess their business and create a robust and strategic plan. Including planning for and buying the right insurance cover!
The long-term survival of your business and the preservation of the wealth that you have painstakingly built will likely depend on it.
For private, owner-managed, or family-owned businesses, a solid business succession plan can drive growth, reduce taxes, and set the stage for accomplishing more.
Invest in an obligation-free consultation with Oakmont, today. Let us help you protect your legacy.
General Advice Disclaimer
The information contained on this website and in this blog post is general in nature and does not take into account your personal situation or circumstance. It is recommended that you consider and use the information provided responsibly and, where appropriate, seek professional advice from a financial adviser.
Although every effort has been made to verify the accuracy and correctness of information, Oakmont Financial Group, together with our consultants, officers, agents, and employees, disclaim all liability for any loss or damage suffered by any persons directly or indirectly relying on this information.