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BUY/SELL (Ownership Protection)
When an owner of a business dies or becomes disabled, often the surviving business partner/s will desire ownership and control of the business, and the estate will want funds to maintain their lifestyle. Buy-sell insurance arrangements can provide the money for this. It allows the surviving business partner/s of a business to buy out the deceased owner’s interest in the business.

People don't plan to fail, but they typically fail to plan. This age-old truth has particular relevance to non-husband and wife business owners, where the death of an owner can result in the demise of an otherwise viable business simply because of the lack of business succession planning.

The Problem
While the owners are alive they can at least negotiate a buy-out amongst themselves, for example on an owner's retirement. But what if one of them dies?

The continuing owners must now negotiate with the deceased owner's legal personal representative, who may well be more concerned about the needs of the estate than the needs of the business.

Probability of at least one owner, where all owners are aged 35, dying before reaching age 65:

Number of owners	Male	Female
2	31%	18%
3	42%	26%
4	52%	33%
5	60%	39%

Australian Life Tables 1990-1992

This table shows that although it seems unlikely, the chance of death among owners is surprisingly high.

For example, there is a 42% chance of at least one of three male owners, all aged 35, dying before reaching age 65.

Many business owners mistakenly believe that this contingency has been catered for in the business' constitutional documentation. We often find there is no buy-out provision, or if there is, it is usually ineffectually drawn up and inadequately funded.

The Solution
To keep ownership of the business amongst themselves, the existing owners would need:

• a succession agreement granting the continuing owners the option to buy a deceased or disabled owner's interest in the business; and
• the right amount of cash at the right time to buy the outgoing owner's interest.

If the continuing owners exercise the option to buy, the deceased owner's heirs or the outgoing owner must sell their interest for a price determined in the agreement. This would usually be the market value calculated by their accountant annually and agreed in writing by the owners.

The problem for the continuing owners can then be how to fund the required purchase price.

Compare the Alternatives
Let's compare five possible ways of funding the required purchase price:

• Realising business assets
  Can you really afford to strip the business of valuable assets at such a critical time?


• Realising personal assets
  Personal assets may be encumbered or may not be readily realisable.


• Borrowing the cash
  Borrowing the cash may seem an obvious solution to funding the purchase price. However, lenders may not be prepared to extend credit after an owner's death or disablement because the future of a re-organised business is uncertain.


• Paying off the outgoing owner's heirs
  It might also be possible to pay off the heirs over a number of years. But why saddle yourself with a debt and obligate yourself to pay off not only principal, but also interest?


• Using Buy/Sell insurance
  Buy/Sell insurance can provide a unique and cost effective solution to this funding problem. What makes it unique is that it can provide the required purchase price in the event of an owner's death or total and permanent disablement, or diagnosis of a critical illness.

It's cost effective because it can provide the required purchase price at only a fraction of the cost of alternative funding options which, at a minimum, would be 100 cents in the dollar for every dollar of purchase price.

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