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Business Succession Planning:

Business Succession Planning

Need for Succession Plan

Need for Asset or Buy/Sell Strategy

Need for Liability or Key Person Strategy

Negotiating a Succession Plan


Simple Succession Plan:

Simple Succession Plan


Complete Succession Plan:

Complete Succession Plan


Financial Needs

Insurance Funding

Retirement Funding


One Page Strategy:

One Page Strategy

Asset Needs

Liability Needs

Personal Needs

Who Pays the Premiums?

Valuing the Business

Simplifying the Valuation Issue

Equity vs. Loan Capital


One Policy Strategy:

One Policy Strategy


Dual Role of Personal Cover

Dual Role of Debt Red'n Cover

Security & Tax-Effectiveness

Cost Savings

Pre-Agreed Purchase Price

Apportionment of Premiums

Methods of Aggregation


Multiple Policy Approach:

Multiple Policy Approach

Super Fund Ownership

Tax Disadvantages

Cost Disadvantages

Other Disadvantages

Geared Premium Funding

Super Buy/Sell


One Page, Two Policy Strategy:

One Page, Two Policy Strategy


Other Issues:

Tax Deductibility

Inadequate Insurance Proceeds

Vendor Finance

Changing Needs

Future Growth of Equity

Trauma Buy/Sell Strategy


Sole Proprietors and Families:

Sole Proprietors and Families


Family Ownership

Sale Strategies

Third Party Buy/Sell Strategies

Estate Equalisation Strategies

Family Buy/Sell Strategies

Second Generation Strategies

Debt Reduction Strategies









The Complete Succession Plan

Issue 1: Strategy (The Relationship Between Business and Personal Needs)


Your Business and Personal Needs

This section focuses on the relationship between your Business and Personal Needs at a strategic and commercial level.

We are used to thinking of our Business interests and needs as separate from our Personal interests and needs.


  • your interest in your Business (your Equity) is actually a Personal Asset that forms part of your Estate; and

  • you might have Personal liabilities for Business Debts and Liabilities (e.g., Personal Guarantees).

Therefore, your Business and Personal interests and needs can be intertwined.

Your Succession Plan should help you to address this bundle of different needs.


Traditional “Multiple Policy Approach”

Insurance is a funding mechanism that can help you meet a financial need upon the occurrence of an Insurable Event.

Business People have both Business and Personal Needs.

Traditionally, Advisers have written one Policy for each separate Need, often resulting in four or five different Policies for each person, often in the name of different owners (the traditional "Multiple Policy Approach").

These arrangements are often difficult to understand and require Policy changes and medical tests each time one of the person’s Needs changes.


How Your Business Strategy Interacts With Your Personal Strategy

Many Clients and Advisers don't realise how the Business and Personal Needs are related or how the insurance arrangements can be simplified.

"One Page, One Policy Strategy"

Set out below is an explanation of:

  • how Business and Personal Needs are related;

  • how your Sale Price and Personal Cover feed into the same "pot" that funds the targeted Capital and Living Expenses requirement of your Estate or Family;

  • how your Buy/Sell and Debt Reduction Cover are related;

  • how you can address all of your Needs on One Policy that operates like an "Insurance Facility" (the "One Policy Strategy"); and

  • how these strategies can be adapted to a Retirement Strategy.


The Relationship Between Business and Personal Needs

The Complete Succession Strategy divides your needs into Asset, Liability and Personal Needs.

Of these Needs, the Asset and Liability Needs are examples of Business Needs.

The Asset Strategy is a Buy/Sell Strategy.

The Liability Strategy is a Debt Reduction or Key Person Strategy.

The Personal Strategy takes into account the balance of your Personal Needs after allowing for the payment of the Purchase Price to your Estate.


Buy/Sell (or Asset) Strategy

The traditional approach to Insurance-funded Succession Planning has focused primarily on the funding of the Purchase Price of a Business Person’s Equity in the Business.

You can insure your Equity, so that you are guaranteed to receive its true value, if you die or become disabled.

For example, if your Equity was valued at $400,000, you might take out a Policy for this amount.

If you die, your estate will receive $400,000 in return for a transfer of the Equity.

This type of insurance is usually called "Buy/Sell Insurance" or "Equity Insurance" (because it insures your Equity in the Business).

Dual Business and Personal Function

Buy/Sell Cover has a dual Business and Personal function:

  • it allows the Continuing Proprietors of the Business to purchase the Outgoing Proprietor's Equity (so that the Business is not damaged by any dispute between the Proprietors); and

  • it contributes the cash Sale Price to the Life Insured's Estate (in exchange for a transfer of the Equity).


Debt Reduction (or Liability) Strategy

The exclusive focus on the value of the Equity often overlooks the need to extinguish personal liabilities (i.e., personal guarantees and mortgages over personal property) with respect to any Debt or other Liabilities of the Business.

Many Business People assume that, if they die and sell their Equity, their personal guarantees will die with them or the Bank will release their personal guarantees.

Unfortunately, these guarantees stay alive and cling to the assets in your Estate.

You do not know whether you have safely passed your Sale Price or any other assets onto your Beneficiaries, until you have made arrangements with the Bank to release your guarantees.

For example, if the debts of the Business totalled $400,000 and they were jointly and severally guaranteed by the two Proprietors of the Business, you might insure each Proprietor for $200,000.

The reduction of the debts of the Business (by half) upon the death of a Proprietor will help create a commercial argument that the Bank should release the personal guarantee without requiring any additional security from the Continuing Proprietor.

This type of insurance is usually called Debt Reduction Cover or Key Person Cover.

Dual Business and Personal Function

Debt Reduction Cover has a dual Business and Personal function:

  • It reduces the Debt owing by the Busienss; and

  • it justfies the Bank releasing the Life Insured's personal guarantee (so that the Life Insured's Estate is no longer liable to the Bank).


Personal Strategy

The above needs are examples of Business Succession Needs.

Business People also need to consider their Personal (or Estate Planning) Needs.

In a sense, your Personal Strategy complements your Business Strategy.

It addresses needs that your Business Strategy did not address or did not address adequately.


For example, if you wanted to fund pre-tax living expenses of $50,000 per annum, then you would need a capital sum of $1,000,000 invested at an interest rate of 5% per annum.

If you own your Equity in the Business in your own name, the Sale Price of your Equity (e.g., $400,000) will usually be paid to your Estate.

However, it might only meet part of the capital amount required to fund your family's living expenses (e.g., $1,000,000).

Personal investments (including superannuation) and insurance cover are intended to meet the $600,000 shortfall.

To the extent that your Sale Price and your other investments are inadequate to fund your Personal Needs, you can use Personal Insurance to fund the shortfall.

For example, if you had no superannuation or other investments, you might need additional Personal Cover of $600,000.


Your Purchase Price and Personal Cover Contribute to the Same "Pot"

Business People have traditionally been encouraged to keep their Business and Personal Strategies separate.

However, ultimately, there is a link between your Business and Personal Needs and Strategies.

Because your Equity is your personal interest in the Business or the Business Structure, the Purchase Price forms part of your Estate.

Therefore, it contributes to your Personal Living Expenses Need.

Both Price and Personal Cover feed into the same "pot" required to fund the $1,000,000 capital requirement of the Living Expenses for you or your Family.

In summary, the Sale Price of your Equity will contribute to your personal "pot", because your Equity is your personal interest in the Business.

However, as the value of your Equity increases, it does more of the job of filling the million dollar pot.


Increasing Need for Buy/Sell Insurance

If you use Buy/Sell Insurance to insure the Sale Price of your Equity, then the Buy/Sell Cover will do more of the job of filling the million dollar pot as your Equity increases in value over time.

Most Business People with growing Businesses find that:

  • their need for Buy/Sell Insurance to fund the Sale Price of their Equity goes up;

  • their Buy/Sell Insurance contributes a greater amount into their personal "pot"; and

  • their Personal Cover can come down.


For example, as the value of your Equity and other investments increases (e.g., your Equity grows from $400,000 to $500,000), they contribute a larger amount to the capital required to fund your living expenses.

If you had separate $400,000 Buy/Sell and $600,000 Personal Cover, you would normally increase your Buy/Sell Insurance as the value of your Equity grows.

If you leave your Personal Cover at the same level (e.g., $600,000), your total sum insured will increase (e.g., to $1,100,000).

Therefore, you might end up with more Personal Cover than you need to make up the shortfall.


Reducing Your Personal Cover as You Increase Your Business Cover

One option would be to reduce your Personal Cover from $600,000 to $500,000, at the same time as you increase your Buy/Sell Cover from $400,000 to $500,000.

These changes can involve time, energy, medical tests and underwriting requirements.

Sounds like a pain, doesn't it? And it is, sometimes literally!


Using the "One Policy Strategy" to Create an "Insurance Facility"

In contrast , a Complete Succession Plan is designed to aggregate Business and Personal Cover onto One Policy.

This allows you to use any excess Personal Cover to provide the Buy/Sell Cover required to fund the increase in the Purchase Price of your Equity.

In other words, it enables you to re-purpose your Cover as your Needs change.

In effect, the strategy creates an "Insurance Facility" or an "Insurance Pool" that allows you to change the mix or break-up of your Insurance between the different needs over time.


"Changing the Mix"

If we aggregate both Needs onto the One Policy, we might find that we have the right total for the indefinite future.

All that needs to change is the "mix" or the "colour" of the Cover.

This process occurs internally within the Policy and does not require any interaction with the Insurance Company.

In other words, once the Insurance Company has accepted the risk, it is on the hook for the Total Sum Insured, regardless of any changes in the internal composition of the Sum Insured.

A Complete Succession Plan enables the Proprietors of the Business to focus on the aggregate of Business and Personal Needs (i.e., the Total Sum Insured) in their relationship with the Insurance Company.

At the same time , it allows the Proprietors to focus on the "mix" or segregation of the Total Sum Insured in their relationship with each other.

The Complete Succession strategy is about:

  • aggregation at the time of establishing the Succession Plan; and

  • segregation at the time of the Claim.


Personal Cover as a Warehouse or Comfort Zone for Future Growth

The One Page, One Policy strategy enables the Proprietors to use the Personal Cover as a "warehouse" or "comfort zone" for future growth in the value of their Equity.

Some of the Cover might start its life as Personal Cover, but might end up as Buy/Sell Cover.

In a sense, a One Policy Strategy recognises that your "Green Cover" can be "Future Blue Cover".

Click here to read more about the dual role of Personal Cover.


No Medical Tests or Underwriting

Because the insurance company sees one Policy for the Total Sum Insured, you might not have to satisfy medical tests and other underwriting requirements, if all you need to do on a review is "change the mix".

You can avoid most, if not all, of the pain!


Responsibility for Payment of Premium

The fact that Business and Personal Cover might be incorporated within the One Policy and Facility does not change the underlying responsibility for payment of the Premium.

Normally, the Premium attributable to any Personal Cover will remain directly or indirectly payable by the Life Insured.


Relationship between Buy/Sell and Debt Reduction Cover

The above analysis highlights the relationship between the Buy/Sell and Personal Cover.

As one type of Cover increases, the other can decrease.

Mathematically, this is an inverse relationship.

However, there is a similar relationship between Buy/Sell and Debt Reduction Cover.

Relationship between Liabilities and Net Asset Value

As the Debt of the Business reduces, the value of the Equity in the Business increases.

This occurs because, in effect, the value of the Equity is a proportionate share of the Net Asset Value of the Business (i.e., Gross Assets - Liabilities).

Assuming the Gross Asset Value of the Business remains constant, any reduction in the Liabilities will result in an equivalent increase in the Net Asset Value of the Business.

Aggregation of Buy/Sell and Debt Reduction Cover

The One Policy Strategy allows Proprietors to aggregate Business and Personal Cover.

Whether or not Personal Cover is incorporated onto the One Policy, it makes sense to aggregate Buy/Sell and Debt Reduction Cover, so that inevitable or predictable increases in the value of the Equity can be funded by re-purposing the Debt Reduction Cover.

In other words, as the Debts of the Business decrease over time, the Debt Reduction Cover can be re-allocated to Buy/Sell Cover.

This is particularly relevant to investments in Property where the Debt is being repaid on a Principal and Interest basis.

Like Personal Cover, Debt Reduction Cover can have a dual role.

Not only does it reduce Debt in the event of a Claim, it can be re-purposed as Buy/Sell Cover as the Debt reduces and the Net Asset Value of the Business increases.



Click here to see a Risk Analysis Worksheet that demonstrates a typical change in the Asset, Liability and Personal Needs of a Proprietor over five years.

Please note how increases in the Buy/Sell Cover are funded by first re-purposing the Debt Reduction Cover and then the Personal Cover.


One Page Summary

Click here to see a one page summary of how a typical Complete Succession Plan works.


Simplifying the Valuation Issue

Click here to see how the One Policy Strategy simplifies issues with respect to the valuation of the Business and the determination of each Proprietor's Purchase Price.


Misunderstanding the Valuation of the Business

In many cases, Business Proprietors have an inflated view of the value of their Equity in the Business.

This impacts on the expectations of their Spouses and Beneficiaries if they die and can cause disputes with the Continuing Proprietors.

Their expectations are usually driven by the need for the cash required to fund their living expenses, as well as any personal debt, alternative venture or investment strategy.

Ultimately, this is a personal need.

However, it affects the value they place on their Equity in the Business.

Two Sources of Income from the Business

While the Life Insured is alive, the income from the Business effectively derives from two sources:

  • the labour of the Life Insured (their salary); and

  • the profit attributable to the investment of capital in the Business (their dividend or profit distribution).

When the Life Insured has died or is no longer able to work, they are no longer able to generate income from their labour.

However, theoretically at least, their capital might still be able to generate a profit (subject to any drop in the revenue or goodwill of the Business).

Valuation Methodology

Because the Business funds two sources of income, it is understandable that people will try to value the Business on the basis of the capital value of both sources of income.

However, in most cases, the valuation of the Business (including the goodwill) will not take into account the amount of the salary received by the Life Insured.

Most valuations assume that the Business will pay market salaries for the labour supplied to the Business, before its capital value is calculated.

They will assume that, if the work was done by someone else, that person (not the Proprietor) would receive a market salary for their labour.

In most cases, the valuation will only take into account the recurring profit attributable to the capital investment in the Business (multiplied by an appropriate "cap rate" or capitalisation ratio to arrive at the capital value of the goodwill).

As a result, the value of the Life Insured's Equity in the Business will normally compensate the Spouse or Beneficiary for the capital value of the profit from the Business.

It will not necessarily compensate the Spouse or Beneficiary for the loss of the Life Insured's salary income.

This need would normally be funded by superannuation, other investments or Personal Insurance Proceeds.

Complete Succession Plan

Using the language of the Complete Succession Plan, this means that:

  • the capital value of the profit will be addressed by the "Asset" (or "Blue") component of the Succession Plan; and

  • the capital value of the salary will be addressed by the "Personal" (or "Green") component of the Succession Plan.

As a result, a Complete Succession Plan allows Proprietors to achieve the appropriate target amount of capital, as well as enabling them to divide it appropriately between Business and Personal Needs.

Simple Succession Plan

In the absence of a Complete Succession Plan, the Spouse or Beneficiary might expect the valuation of the Business to compensate them for the loss of income.

In other words, they will expect the Sale Price to take into account both:

  • the value of the Business based on its profit; and

  • the loss of salary.

These expectations and valuation issues can lead to significant disputes, a break-down in relationships, loss of customers, and the loss of capital value.

These disputes can be minimised, if the parties have pre-agreed the Purchase Price of the Equity.


Pre-agreeing the Purchase Price

Click here to read about the ability to avoid valuation disputes by pre-agreeing the Purchase Price.


Implications for Your Retirement Strategy

Many of the issues involved in the design of an Insurance Strategy also arise in the case of a Retirement Strategy.

Click here to read about how these strategies can be adapted to help design your Retirement Strategy.


The Other Three Issues:

Issue 2: Financial Needs ( "The Three Needs")

Click here.

Issue 3: Insurance Funding (The “One Page, One Policy Strategy”)

Click here.

Issue 4: Retirement Funding ("Voluntary Events")

Click here.


Copyright: Clover Law Pty Ltd



Adviser Tip

A Complete Succession Plan is not just about Death, it's not just about Insurance and it's not just about selling your Equity.

See more Adviser Tips







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