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Publications and Documents:
Adviser Tips:
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 Tax Treatment of Self-Ownership Agreements Vested and Indefeasible Interest Simplifying the Valuation Issue Simple or Complete Succession?
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Prioritising Needs
Sometimes your Needs exceed the amount of Insurance Cover that you can obtain. This might make it necessary to insure some Needs rather than others or to reduce the amount of Cover allocated to a particular Need (or Needs). This guide suggests how you might approach the relative priorities of your Needs.
When Might Your Needs Exceed the Available Cover? Your Needs might exceed the available Cover in two situations:
Buy/Sell Cover versus Debt Reduction Cover The most common situation is where there is insufficient Cover to:
Should you fund the whole of the Purchase Price, but take the risk that the Bank will not release the Personal Guarantee and Securities? Alternatively, should you prioritise releasing the Securities and insure less of the Purchase Price? Prioritise the Purchase Price? If you prioritise the Purchase Price, you will complete the transaction between the Vendor and the Purchaser. However, this will result in the Vendor having a greater cash reserve, if the Bank decides to enforce its rights under the Guarantee and Securities. It actually makes the Vendor a bigger target in the enforcment proceedings. Prioritise the Debt Reduction Cover? If you prioritise the reduction of the Business Debt, then you will hopefully obtain a release of the Guarantee and other Securities. This will sever the link between the Vendor and the Bank. However, it will create a shortfall in the Purchase Price. The Purchasers will still have to fund the whole of the Purchase Price payable under the Agreement. Their options with respect to the shortfall will be similar to the situation where they did not have any Insurance Cover. The shortfall might have to be funded by way of:
It is common for Business Succession Plans to contain Vendor Finance Arrangements for the payment of any shortfall. Conclusion Most Businesses tend to prioritise the Debt Reduction Cover.
Buy/Sell Cover versus Personal Cover The Outgoing Proprietor (and/or their Related Parties) will usually receive the aggregate of the Purchase Price and the Personal Cover. You could argue that, as long as the total is appropriate, it doesn't matter to the Outgoing Proprietor. However, it is more complex than that, and you need to take into account the interests of the Purchasers as well. Prioritise the Purchase Price? If you prioritise the Purchase Price, you will complete the transaction between the Vendor and the Purchaser. The Purchaser will be under no further obligation to the Vendor. However, this will leave a shortfall in the amount of Personal Cover. In the absence of sufficient Personal Cover, there will be no other method of funding the shortfall or the Outgoing Proprietor's Needs. Prioritise the Personal Cover? The Personal Cover is normally intended to meet the balance of the Outgoing Proprietor's Needs after taking into account the Purchase Price that they will receive. If you prioritise the Personal Needs, there will still be a shortfall in the total as a result of the shortfall in the Purchase Price. However, in the absence of sufficient Buy/Sell Cover, the Purchasers will still have to fund the whole of the Purchase Price payable under the Agreement. Again, this could be achieved by way of:
The important thing is that the Outgoing Proprietor will receive:
As a result, this option maximises the amount receivable by the Outgoing Proprietor and their Family. Conclusion To the extent that the Outgoing Proprietor's Family might be the neediest of the parties, most Businesses tend to prioritise the Personal Cover. However, this issue needs to be carefully considered in each case. In particular, you should take into account who will be paying the Premiums. The Life Insured would normally pay the Premium with respect to the Personal Cover. The Premium with respect to the Buy/Sell Cover would normally be shared proportionately between the Proprietors. If the Business is the only party prepared to bear the Premium Cost, it would be entitled to prioritise the Purchase Price.
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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.
Please contact us to arrange a meeting or teleconference.
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