What was their situation when we met?
A successful software business had an issue with regards to their Buy Sell cover and agreements that they wanted to review. We reviewed the insurance of the four business owners and ascertained that the insurance was largely correct, but they had not had any agreement to title together, which means they all had personal insurance that was intended for business use. However, it was purely personal insurance and event of death of one of the partners, the spouse could easily say “No, this is just my personal insurance and please pay me my part of the business.” This could have had a major impact on the success and ongoing running of the business.
What Happened?
We recommended and implemented Buy Sell cover which allows the selling of a portion of the business to the remaining partners whilst taking care of the spouse in the case of death. In addition to this, we recommended a Key Person policy that in the event of Death, TPD or Trauma (this will cover major events like heart attack, cancer and stroke), they would receive a cash injection into the business for either debt reduction or to replace the revenue hole caused by this person’s sudden absence from the business.
What made Trumpet Financial Different?
Whilst a lot of advisors will arrange the insurance, they will not tend to worry about making sure an agreement to tie it all together is in place that ensures any critical situation is covered off 100% correctly. Trumpet Financial ensured the agreement stated what the insurance was for, as well as the mechanism to transfer the ownership of the business in such a situation.
In addition to this, the previous advisor had not looked at the individual circumstances of the four business owners and they all needed varied personal insurance, so we addressed that at the same time. We set up relevant insurance and, in some cases, developed a wealth creation plan for several of the partners designed to guide them towards their private wealth goals.
What is the latest?
By staying in touch with the business owners on a regular basis, we have recently performed a review and found their business value has grown significantly. As a result, we have made some adjustments, we have not had to increase their covers to any significant event because debt levels have been reduced. So, with some minor adjustments, we have recalibrated things for their current situation.
What is the Lesson?
The lesson from this client is that whilst many business owners think “I have insurance in place, so everything is okay”, the key with any Buy Sell cover is having the agreement that ties it all together and having the right ownership structure for the cover from a taxation perspective.
The second benefit I found over the years with this client particularly is that they feel like this gives them a framework or a baseline to work with from a valuation perspective because their end goal is to build a business of significant saleable value, this frames their thinking when they are having discussions with other parties and their team around “where we’re at now and where we’re trying to head”.
What is the Risk?
Business owners run the risk if they do not address this that they are leaving their family and estate open to dispute if an unforeseen event occurs, in fact I’ve seen several scenarios where businesses either implode post the unforeseen event or people have been unfairly dealt with financially.
A well-known example was where our former Prime Minister’s wife Therese Rudd bought out her deceased business partner for $520K due to the agreement being poorly worded and her paying 1/10th of the value of the equity that her departing partner was entitled to.
