Publications and Documents:

Publications and Documents


Adviser Tips:

Adviser Tips


Adviser Updates:

Adviser Updates


Individual Updates (Most Recent First):

Adverse ATO Advice on Super Buy/Sell Cover

Partnership and Trust Loan Accounts

Effect of Debt Reduction Cover on Buy/Sell Cover

Prioritising Needs

Simultaneous Deaths

Mutual Will Strategies

Joe Hockey on Trusts

Tax Treatment of Self-Ownership Agreements

Vested and Indefeasible Interest

Gross or Net Value?

Henry Report

Deemed Dividends

Super Buy/Sell Cover

Bamford in the High Court

Trauma Cover in Super

Origins of Self-Ownership


Methods of Aggregation

Valuing the Business

Duty to Give Tax Advice

Equity vs Loan Capital

Horses for Courses

Commercial Debt Forgiveness

Choice of Trustee

Simplifying the Valuation Issue

Hybrid Succession Strategy

Hedge and Wedge Strategy

Sole Proprietors and Families

Free Teleconference

Simple or Complete Succession?

Contemporaneous Agreement

Geared Premium Funding

Super Fund Ownership

Business Family Will








Valuing 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.


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.


Copyright: Clover Law Pty Ltd



Adviser Tip

The One Page Strategy is designed to help you simplify Succession Planning.

It helps you understand your needs, it helps you quantify them, it helps you cost them, and it helps you prioritise them.

See more Adviser Tips




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