Nobody likes to think about it, but it’s inevitable that one day you will leave your business. Whether you decide to sell up, retire or have to get out of business due to health reasons, it’s important that you plan for that day. A succession, or exit, plan outlines who will take over your business when you leave.
A good succession plan enables a smooth transition with less likelihood of disruption to operations. By planning your exit well in advance you can maximise the value of your business and enable it to meet future needs.
A buy/sell agreement is a contract entered into between business partners to allow for the buy out the other partner's interest in the business should a specific event occur. Events which may trigger a buy/sell agreement include death, trauma, long-term disability, retirement or bankruptcy.
These agreements are often linked to an insurance policy to provide necessary funding to be able to buy out the deceased/disabled/departing partner's interest.
Generally the agreement is structured in such a way that it does not matter what business structure has been used to own the business i.e. family trust, company, partnership.
A business may be transferred on the death of an owner either by:
The buy/sell agreement will take precedence over the will because the business will be transferred pursuant to the contract. In this way, the business will not be the subject of any claim against the estate nor, be delayed by Probate or estate administration issues.
The buy/sell agreement will need to state either the value of the business or how the value is to be determined when the agreement is triggered. The agreement will state whether the value to be applied shall be:
The buy/sell agreement is normally funded through an insurance policy. Depending on the parties and circumstances, the policies can be held under any of the following arrangements:
Clients will need legal and tax advice on what is the most suitable arrangement for them.
If a buy/sell agreement triggers payment of a life insurance policy, it will be exempt from CGT provided the gain or loss is made by:
A trauma or total and permanent disability insurance policy is subject to CGT if it is owned by the business. Only a trauma or total and permanent disability insurance policy owned by the insured is exempt. Consideration should therefore be given to the business owner holding the policy on himself/herself.
As the buy/sell agreement results in the sale of the business once exercised, a CGT liability will arise to the vendor. The small business CGT concessions may operate to reduce this CGT liability.
The essential characteristic of a deductible insurance premium is that it be intended to provide an income.
A self-employed business owner can claim a deduction for premiums on a policy which will pay income during a period they are disabled. Normally, if a policy includes a component to pay a sum on death or disability, the component relating to death cover will not be deductible. However, it may be deductible if the following four criteria are met:
The negotiation and preparation of a buy/sell Agreement or other business succession documents does require legal and financial information specific to your unique circumstances.
At Briese Lawyers, we look forward to working closely with you and your accountant/financial advisor to ensure that your personal and business succession needs are met.