...preserves the value of your business in the event of the death, disablement or critical illness of a key person.

How?
By understanding the adverse financial consequences for the continuing principals and their families.

Business continuation and succession planning is not optional; it is essential for every business.

For example, some questions that every business needs to address are:
•Will the ongoing principals and equity holders have the funding to acquire the exiting equity holder's business interest?
•What assets will need to be protected? - consider business debt levels and the likelihood of a reduced ability to service debt;
•Will business revenue be affected? - consider the need to replace and train new personnel to cover the loss of key personnel or a principal;
•What is the extent of personal and other guarantees and indemnities?
•What is the level of internal debt? - e.g.loans to principals, retained profits;
•Will there be ongoing business expenses? - consider the difficulty in meeting these expenses in the event of a crisis.

A business insurance specialist will address all of the above and tailor a recommendation for your business based on the outcome of a comprehensive fact finding process.

They will ascertain the most appropriate type of agreement and documentation that is required, whilst considering the ownership of the funding and any taxation implications. The tax implications are often the most important aspects of Business and Protection Planning. If the ownership of the agreement and documentation is incorrectly established then the taxation implications can be significant.

Four key areas of discussion are:
1. Buy & Sell-
◦How important to you is the continuity of the business? Why?
◦Would the departing owner or their estate retain or sell their share?
◦Would the proceeds be expected to provide income for the departing owner and/or their family?
◦Would this adequately meet their needs?
◦Have tax consequences been considered? How much tax would be payable?
◦Who would the shares in the business be sold or transferred to? Does that party want to purchase?
◦How much funding would be needed? Will finance be required?
◦Have the transfer/funding strategies been documented and funded? What are the trigger events?
◦When was this strategy last reviewed?
◦Are any of the owners spouses active in the business? What are their roles?
◦Would the spouse remain in the business if an owner died or became disabled?

2. Key Person Asset-
◦Would the capital value of the business suffer without the key person? Even with a replacement funded by key person insurance cover?
◦What percentage of the current capital value and yearly capital appreciation is attributed to the key person?
◦Are the business owners jointly and severally liable for any business loans/debts?
◦What percentage of the loans/debts are the owners responsible for?
◦What percentage of the loans/debts would need to be settled in case of the death, disability or a critical illness of a business owner?
◦Are there any proprietor loan accounts to the business

3. Key Person Revenue-
◦Are there any employees responsible for the generation of a large percentage of revenue?
◦What role does the key person perform?
◦What position would need to be filled?
◦What would the annual salary cost be to replace the key person?
◦What percentage of revenue is generated by the key person?
◦What effect would the loss of this key person be on profit, revenue and cash flow?
◦How long would it take to recruit and train a replacement to produce the same result?

4. Business Overheads Cover
◦How many business owners/partners are there in the business?
◦If one were unable to work due to illness or injury, how long could business expenses be paid from reserves?
◦Would creditors continue to extend credit?
◦Would creditors call for payments?
◦Would valuable staff have to be retrenched?
◦Would leases have to be surrendered and property vacated?
◦Would the business have to close?
◦How many business owners/partners are there in the business?
◦How much revenue does each owner/partner generate for the business?
◦Are there any income producing employees?

Author's Bio: 

Chris Cornish is a financial planner based in Perth, WA. He regularly writes articles on financial planning and retirement planning as well as general economic updates. Please visit http://www.avantfinancial.com.au for further interesting articles. Further information about Chris and Avant Financial Services can be found at http://www.avantfinancial.com.au/about-us.html.