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Business Succession Planning:

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Need for Succession Plan

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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




Debt Reduction and Key Person Insurance (Liability or "Red" Needs)


Liability Needs

The Liability Needs include requirements of the Business traditionally called Key Person Needs.


Red Needs

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


Purpose of Key Person Cover

The purpose of Key Person Insurance is to:

  • allow the Business to repay any external debt (so that the Outgoing Proprietor can be released from any personal Guarantees and Securities over personal assets for Business Debt);

  • repay Loan Accounts owing to or by the Outgoing Proprietor (or any Related Party);

  • compensate the Business for any loss of income (revenue) resulting from the loss of the Key Person; and

  • compensate the Business for any loss of goodwill (capital) resulting from the loss of the Key Person.


Debt Reduction Cover (External Debts)

Many Businesses have external Debts owing to Banks or other Creditors.

In some cases, the Creditor might require Personal Guarantees or other Securities (e.g., a mortgage over personal residential property) by way of Security for the Debt.

Many people assume that, if they die and/or sell their Equity in the Business, the liability with respect to the Guarantee will die with them.

Unfortunately, the liability stays alive and binds their Estate.

In a sense, they cannot be confident that the Sale Proceeds of their Equity in the Business (or any other assets in their Estate) will safely pass to their Beneficiaries, unless and until they have obtained a release of the Guarantee from the Creditor.

Debt Reduction Cover is designed to reduce the Debt of the Business upon the occurrence of the Insured Event.

This strategy is also designed to minimise any concerns that the Bank or Creditor might have about the inability of the Business to service principal and interest payments in the absence of the Key Person.


Assume that a four Partner Business has a Debt of $800,000.

If we insure the Life Insured for a proportionate share of the Debt (say, $200,000), then at the time of Death we can say to the Creditor:

  • Four people used to be "on the hook" for $800K;

  • The Business has reduced the Debt by $200K;

  • Three people are now on the hook for $600K;

  • The loan/security ratios have stayed the same;

  • The Business has built a commercial argument to justify the Creditor releasing the Personal Guarantee.

As a result, the Outgoing Proprietor will be able to both sell their Equity and extinguish their Liability.

In other words, their Succession Plan will enable them to "leave both sides of the ledger".

If they retain their liability under any Personal Guarantees, then the Sale Proceeds and other assets in their Estate will remain available to the Creditor to satisfy the Debt of the Business in the event of a default.

Amount of Debt Reduction Cover

It is common to insure a proportionate amount of the Debt with respect to each Life Insured.

However, the appropriate amount depends on the views of the Creditor with respect to the relative importance of the particular Life Insured to the Credit Facility and Security arrangements.


Debt Reduction Cover (Loan Accounts)

In many cases, the Proprietors of a Business lend funds to the Business to fund working capital, particularly in the early stages of the Business when it might not be able to obtain external debt.

In other cases, the Proprietors might withdraw funds from the Business over and above their profit share in order to fund personal needs or liabilities.

In these cases, there might be a loan owing by the Business to the Outgoing Proprietor (or vice versa) upon the occurrence of the Insured Event.

A loan owing:

  • to the Outgoing Proprietor (or a Related Party) is called a Credit Loan Account; and

  • by the Outgoing Proprietor (or a Related Party) is called a Debit Loan Account.

Just as the liability with respect to the Guarantee will remain alive, any Loans owing between the Business and the Outgoing Proprietor will remain owing and will need to be repaid either to or by the Estate.

Debt Reduction Cover can be used to repay 100% of the Loan Account in these circumstances.


Key Person Income (or Revenue) Needs

Often the loss of a Key Person can result in the loss of Income or Revenue, either on a temporary, once-off basis or on a more long-term basis.

Alternatively, if it is expected that the Income or Revenue is not likely to suffer, it might be prudent to fund the salary cost (as well as head-hunter's or consultancy fees, relocation expenses and other on-costs) of a replacement employee for a period of, say, 12 months with Insurance Cover.

This would give the Business confidence that it could weather any storm or fund the replacement employee's salary without any financial embarrassment.

Some Businesses insure the salary costs for two or three years.

However, normally it would be expected that the replacement employee would be earning their own way after 12 months.


Key Person Capital Needs

Sometimes the loss of a Key Person means that the Business might also lose knowledge, expertise, relationships, contacts, clients, customers, suppliers, goodwill, or growth potential that a replacement employee cannot be expected to maintain.

In these cases, the loss of goodwill might impact on the capital value of the Business and the value of the Proprietors' Equity in the Business.

It is possible to "guesstimate" the possible loss of goodwill and insure it, so that the capital value of the Business and the Proprietors' Equity is maintained.

This might also minimise the impact of any drop in value on Security arrangements with respect to External Debts.

In professional firms, it might be necessary to fund the capital cost of acquisition of a replacement Partner (including their practice) in order to replace the Outgoing Proprietor and their area of expertise.


Tax Implications of Debt Reduction and Key Person Cover

Please click here to read about the tax implications of this type of Cover.


Fact Finder

Please click the following links to see part of the Complete Succession Fact Finder that has been completed for:



Copyright: Clover Law Pty Ltd



Adviser Tip

Your guarantees don't die when you do.

When you leave a Business, you need to exit both the Asset and the Liability side of the ledger.

See more Adviser Tips


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