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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 Need for an Asset (or Buy/Sell) Strategy


The purpose of a Business Succession Plan is to pre-agree a strategy that will enable a Business Proprietor to exit a Business upon:

  • Retirement; or

  • the occurrence of an Insured Event.

An important component of this strategy is the need to sell the Business Proprietor's Asset or Equity in the Business.

Failure to document a strategy is a recipe for dispute, delay, expense and potential destruction of the Business and the wealth of the Proprietors.


Commercial Issues

There are two commercial reasons for pre-agreeing a strategy to sell the Proprietor's Equity in the Business upon the occurrence of an Insured Event:

  • the Continuing Proprietors might not want to carry on business with the Outgoing Proprietor's Spouse or Beneficiaries; and

  • given a choice, the Outgoing Proprietor's Spouse or Beneficiaries would probably prefer to receive the capital value of the Equity in the Business in cash rather than remain involved in the Business.

While all parties might prefer that the Outgoing Proprietor's Spouse or Beneficiaries sell their Equity in the Business, the problem is reaching agreement on the terms of sale (especially the amount of the Sale Price).

The dimensions of the problem are more apparent when you put on the hat of either the Purchaser or the Vendor and think about the issues from their perspective.


Carrying on Business with the Family (the Purchasers' Perspective)

This reason looks at the issue of succession from the point of view of the Continuing Proprietors (the Purchasers).

Normally, the Outgoing Proprietor's Equity will pass to their Spouse or a Beneficiary through their Will.

This means that the Beneficiary will become a co-owner of the Business with the Outgoing Proprietor's former Partners.

If the Beneficiary is a Spouse, they might have had very little to do with the substantive operation of the Business and might not be able to make a substantive contribution in the future.

Yet, they might still have an expectation of receiving a substantive income similar to the income previously received by the Outgoing Proprietor.

This might not be practical, if the Spouse is unable to make any substantive contribution to the generation of income.

If the Beneficiary is a child of the Outgoing Proprietor, then in addition to the above issues, the ownership of the Business might be split between quite different generations with quite different views about how the Business should be run.

This can lead to significant disputes, a break-down in the relationship between the Proprietors, the alienation of customers, clients and suppliers, and the loss of capital value.

This can eventually lead to the winding up of the Business.

Ultimately, the goal of the Purchasers is to obtain 100% control of the Business by paying the lowest feasible Sale Price, so that they do not undermine the financial viability of their investment in the Business.


The Desire for Cash Rather than Equity (the Vendors' Perspective)

This reason looks at the issue of succession from the point of view of the Spouse or Beneficiaries (the Vendors).

Given the choice, many Beneficiaries would prefer to have the cash value of the Proprietor's Equity rather than ownership of the Equity and the income stream (if any) that comes attached to it.

If they received a lump sum, they might be able to:

  • fund their living expenses;

  • repay personal debt;

  • invest the Sale Proceeds in a venture of their own; and/or

  • invest the Sale Proceeds in a more liquid and balanced portfolio of assets.

In many cases, the burden of inherited ownership prompts the Beneficiary soon afterwards to ask the Continuing Proprietors to buy their Equity.

Ultimately, the goal of the Vendors is to sell the Proprietor's Equity for the maximum Sale Price achievable in the circumstances (even if they have to threaten to remain in the Business if they do not receive the desired Price).


Valuation Issues

Unfortunately, in many cases, the Spouse or Beneficiary will have an inflated view of the value of the Equity.

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.

While the Life Insured was alive, the income from the Business effectively derived 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, 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.

It 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 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.

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

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

  • the loss of salary; and

  • the value of the Business based on its profit.

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


Conflicting Goals

It is clear that this situation creates two mutually exclusive goals: one minimising and the other maximising the Sale Price that has to be paid.

This is a recipe for dispute, delay, expense and potential destruction of the Business and the wealth of the Proprietors.


Documented Exit Strategies

In many cases, the Proprietors are mutually fearful of the above prospects.

The issue is: how to avoid the worst case scenario by pre-agreeing a mutually acceptable Sale Price and having a funded Exit Strategy.

In the case of Insurable Events (such as Death, Total and Permanent Disablement and Trauma), it is possible to fund the Sale Price with Insurance Proceeds.

This method of funding avoids the need to borrow the Sale Price from a Bank, sell other Personal Assets or use cash allocated to other purposes.

However, because the Insurance Cover can be reviewed annually or regularly, it is possible to ensure that the whole of the Pre-agreed Sale Price at any particular time will be funded by Insurance Proceeds.


Legal Conveyancing or Sale Agreements

The need to structure the legal arrangements with respect to the Insurance Cover resulted in Lawyers preparing Conveyancing or Sale Agreements that might or might not be triggered by the occurrence of an Insured Event in the future.

These Agreements needed to address the relatively sophisticated tax implications with respect to Insurance Proceeds that are discussed here.

As a result, Lawyers eventually adopted the practice of preparing dedicated "Buy/Sell Agreements", in addition to any Proprietors Agreements (such as Partnership or Shareholders Agreements) that the Proprietors might have had.


Buy/Sell Agreements

When the Business Succession Agreement focusses primarily on the Succession Plan for Insured Events, it tends to be called a "Buy/Sell Agreement".

Many Buy/Sell Agreements fail to deal with other Succession Planning issues like:

  • retirement;

  • increases in the value of the Business over time;

  • shortfalls in the amount of insurance available to pay the Purchase Price; and

  • the extinguishment of the Proprietor's liability for Business Debts under Personal Guarantees and other Securities.

These are dealt with in a Complete Succession Plan and the Business Succession Agreement that documents a Complete Succession Plan.

However, sometimes for business or personal reasons, a Business might prefer to document a Simple Succession Plan.

Click here to read about Buy/Sell or Business Succession Agreements.


Self-Ownership Buy/Sell Agreements

Most Lawyers (other than Clover Law) use Self-Ownership Buy/Sell Agreements and recommend that the Buy/Sell Cover be owned by the relevant Life Insured personally.

Click here to read more about Self-Ownership Buy/Sell or Business Succession Agreements.


Standard Clover Law Self-Ownership Business Succession Agreement

Click here to learn more about the standard Clover Law Self-Ownership Business Succession Agreement used for a Simple Succession Plan.

This is a more traditional Buy/Sell Agreement which deals only with the Buy/Sell or Equity Insurance Cover.

However, unlike most other Buy/Sell Agreements, it includes succession strategies for retirement and events other than Insurable Events.

Clover Law usually prepares this type of Agreement where:

  • a Complete Succession Plan is not required or relevant; or

  • it is preferred by the Business or its Advisers.


Ownership of Equity by Life Insured

By definition, Self-Ownership must pay the Purchase Price to the Life Insured or their Estate.

Therefore, preferably, each Life Insured should own the Equity in the Business in their own name (rather than in the name of a Related Party).

Clover Law normally uses a Business Insurance Trust Agreement, if any of the Equity is owned by a party other than the Life Insured (i.e., a Related Party Vendor such as a spouse, Family Company or Family Trust).


Equity vs Loan Capital

Many Clients and Advisers misunderstand the difference between Equity Capital and Loan Capital when they design a Succession Plan.

If a Proprietor has both Equity and a Loan Account, it is important that their Succession Plan facilitates both:

  • the sale and purchase of the Equity; and

  • the repayment of the Loan Account.

A proper understanding of the difference is required in order to structure an effective Succession Plan.

In effect, their Succession Plan needs both:

The Liability Strategy involves different legal, commercial and insurance considerations to an Asset or Buy/Sell Strategy.

A Complete Succession Plan is designed to address these considerations cost- and tax-effectively.

Please click here to read about the difference between the two interests and the implications for the design of a Succession Plan.


A "Simple Succession Plan"

A Simple Succession Plan tends to focus primarily or exclusively on:

  • the sale of the Business Person's Asset or Equity in the Business (the "Asset Strategy")

  • upon the occurrence of an Insured Event.

Click here to read about the nature of a Simple Succession Plan and how it differs from a Complete Succession Plan.


A "Complete Succession Plan"

Click here to read about the nature of a Complete Succession Plan and how it differs from a Simple Succession Plan.


Sole Proprietors and Family Businesses

The Succession Planning Strategies on this web site are most relevant to Multiple Proprietor Businesses in which there are arms-length Proprietors or Owners.

However, they can also be relevant to Sole Proprietor and Family Businesses.

Click here for strategies for Sole Proprietors and Family Businesses.


The Four Planning Issues

Set out on the following pages is an overview of four basic planning issues that help understand and design a Complete Succession Plan:


Where to Start

Issue 1 is a good starting point to understand the unique benefits of a Complete Succession Plan and how it differs from other approaches to Succession Planning.


Free 20 Minute Teleconference

If a Client is uncertain whether to attend a Client Meeting or use the Clover Law Documentation Service, Clover Law offers a free teleconference (of up to 20 minutes) with the Client to explain the purpose and benefits of a Complete Succession Plan and the "One Page, One Policy Strategy".


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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