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Business Succession Planning: Need for Asset or Buy/Sell Strategy Need for Liability or Key Person Strategy
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Sole Proprietors and Families: Third Party Buy/Sell Strategies Estate Equalisation Strategies
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Dual Role of Debt Reduction Cover
The analysis here 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.
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Adviser Tip Your Purchase Price and your Personal Cover both contribute to the "pot" you have created to fund the total capital requirements of your family. As your Purchase Price increases over time, your Personal Cover can come down. If they are both on the One Policy, all you have to do is "change the mix".
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