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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




Buy/Sell or Equity Insurance (Asset or "Blue" Needs)


Purpose of Buy/Sell or Equity Insurance

The purpose of Buy/Sell or Equity Insurance is to address Asset Needs.

The Asset Needs include:

  • the Purchase Price of the Life Insured's Equity in the Business;

  • any Capital Gains Tax payable with respect to the disposal of the Equity; and

  • any Transactional Costs (such as stamp duty, legal fees, accounting fees and valuation fees) payable upon the occurrence of the Insured Event.


Blue Needs

On the One Page Risk Analysis Worksheet, these Needs are coloured Blue.


The Need for an Asset Strategy

Click here to read about the need for an Asset (or Buy/Sell) Strategy.


Purchase Price of Equity in Business

The purpose of Buy/Sell or Equity Insurance is to:

  • fund the Purchase Price of any Equity that needs to be sold by an Outgoing Proprietor (and any Related Parties) to the Continuing Proprietors upon the occurrence of an insured event with respect to the Outgoing Proprietor;

  • ensure that the Vendors receive full value for their Equity; and

  • enable the Purchasers to purchase the Equity without having to borrow from a bank.


Capital Gains Tax

This tax liability is the tax liability with respect to any Capital Gain with respect to the sale of the Proprietor's Equity (not the Insurance Proceeds).

The purpose of insuring the Capital Gains Tax is to:

  • identify that there will or might be a liability created upon the occurrence of an Insured Event; and

  • insure it (in the same manner that a home or personal loan might be insured).

This enables the whole of the Purchase Price to contribute to the capital amount required to pay for living expenses.


Assuming that the Vendor is an individual (or trust), has a nominal Cost Base and pays the top marginal tax rate, the CGT liability is approximately 25% of the Sale Price.

The CGT liability with respect to a capital gain of $400,000 would therefore be approximately $100,000.

In effect, a total Sum Insured of $500,000 would ensure that the net Sale Price payable to the Life Insured (or their Estate) after payment of the CGT liability would be $400,000.

Comfort Zone for Future Growth

The CGT provision also provides a comfort zone within which to increase the insured Sale Price over time (without having to apply for additional cover).

In effect, the Sale Price could be increased from $400,000 to $500,000 without requiring additional cover (if the Life Insured was happy to fund the CGT liability out of the Sale Proceeds).

Premium Cost

If the CGT liability of $100,000 was insured at an average premium cost of 0.3%, the initial premium would be approximately $300 per annum.

Small Business CGT Concessions

There are now generous exemptions from CGT in the case of Death and Permanent Incapacity.

However, the entitlement to the concessions depends on strict compliance with the legislation (which requires a detailed analysis of the circumstances of the Life Insured and/or the Owner of the Equity in the Business).

For example, the exemption might not be available in the case of a Sale triggered by the payment of a Terminal Illness Benefit, even though the exemption might have been available in the case of a Death.

It is not safe to assume that an exemption will be available in all cases where a Benefit is paid by the Insurance Company.

As a result, a preliminary draft Succession Plan assumes that the CGT Concessions will not be available.

A more precise determination of the entitlement to these concessions can be obtained from an Accountant or Clover Law when a Business has decided to proceed with a Complete Succession Plan.

The Fee for this analysis is not included in the standard Documentation Fee.


Transactional Costs

Similarly, the purpose of insuring the Transactional Costs is to identify that there could be significant out of pocket expenses that would otherwise require the parties to borrow funds from a Bank at a time when they are commercially vulnerable.


Fact Finder

Please click the following link to see the Equity Analysis Item of the Complete Succession Fact Finder that has been completed for a typical professional practice:


Sole Proprietors and Family Businesses

Buy/Sell or Equity Insurance is most relevant to Multiple Proprietor Businesses in which there are arms-length Proprietors or Owners.

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

Click here for strategies for Sole Proprietors and Family Businesses.


Inadequate Insurance Proceeds

It is not always possible for all of the Lives Insured to obtain the required amount of insurance, because of health or premium cost.

In these cases, the available Insurance Proceeds might fund only part of the Pre-Agreed Purchase Price.

See here for a discussion of strategies for this situation.



Copyright: Clover Law Pty Ltd



Adviser Tip

In the case of Retirement, a Complete Succession Plan can pre-agree the Purchase Price and specify a timeframe for payment.

If you do not have adequate insurance for an Insurable Event, your Succession Plan can specify a timeframe for payment of the shortfall.

See more Adviser Tips


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