Are you prepared for the unknown? The importance of buy/sell insurance.

If you’ve chosen the entrepreneurial life and are intent on running your own business – you may have decided that you want to work with Shareholders or business partners (A decision I would ask you to think LONG and HARD about…let’s save that for a face to face discussion…). This decision will largely cater for the evolution of the workforce as more people are taking it on themselves to oversee their own domain, seeking out being the business owner rather than an employee. As a business owner, your business is not just about work – it’s your life and your livelihood. It may even end up being the single biggest asset that you or your family have.

But have you considered what happens if you or one of your business partners becomes ill or injured and can no longer stay in the business?

The time to sort this out is not when an event has occurred but all the way at the beginning of the business. You must not only plan for an amicable exit from the business (like one partner wanting to leave etc) but also a forced exit – by way of illness or injury.

The biggest issue about this type of situation is its unpredictability. If it happens at a time when the business may not be doing so well, or if the individual partners/shareholders are not able to buy out the deceased or injured persons shareholding or portion of the business.

To deal with this situation, many businesses will put together a legal deed loosely called a Buy/sell agreement. In that deed, the business will outline the asset (business, chattels, etc) and the proportion of ownership, a value or a method of valuation for the business. It will also outline how the buyout of the business should happen.

As is often the case, the surviving business partner/s may not have the capital to pay the surviving spouse or family at the exact time of the illness, injury or death. To compensate for this risk, there are several types of insurance available to provide funds for remaining partners to purchase business shares from a departing co-owner in the event of death and permanent disability or trauma.

Having a well-structured and appropriate policy in place can speed up the transfer at a tragic time and make it less stressful on the surviving spouse or family as well as allow the surviving business interests to continue running the business with minimal disruption.

There is a significant benefit to both the remaining business owners and to the family or departing business owner provided the policy is setup correctly and the sums insured are adequate.

Check out the next blog on this series – What types of risk can be included in a Buy/Sell agreement and how can the policies be owned?