the four key ways we help business owners 

  • Business AGREEMENTS and the insurances that underpin them

  • Business succession and maximising business value

  • Structuring to reduce liability risk

  • PURCHASING THE COMMERCIAL PREMISES YOU WORK FROM

1.  BUSINESS AGREEMENTS AND THE INSURANCES THAT UNDERPIN THEM

 

A partnership agreement is like an employment agreement or pre-nup between the partners. It is a framework for how the partners agree to work together and is intended to provide confidence and clarity to all partners now and in the future, including agreement on business succession.

Having an agreement, goes some way to ensure that if something changes in the partnership relationship or if something occurs that could make agreement difficult down the track, then there should be little dispute or confusion.

Two of the main events that a good partnership agreement should address include:

a)     Short term absence due to either voluntary or involuntary reasons

b)     Long term absence due to either voluntary and involuntary reasons (IE: a buy/sell agreement)


a)    SHORT TERM ABSENCES

Your business agreement should clearly state what your agreed policy is on paying an ill partner while they are unable to work due to medical reasons. The process is kind of like deciding how much sick leave you are prepared to cover for each other. Once agreement is reached on a time frame then it is important that each director have their own personal Income Protection and Trauma insurance, to cover their own risk.

With this said, the loss of a key person in the business can also have direct impact on the financial viability of the business and there are two policies available to protect your risk in this area.


 

KEY MAN RISK

As a small business owner you work hard to make your business a success. For most small businesses the owners are integral to the ongoing success of the business, but if you or your business partner dies or cannot work for a medical reason, what happens to your asset? 

This is a question that most Australian business owners cannot answer with confidence. Why? Because they don’t have a defined plan in place to deal with it. 

When it comes to managing key man risk, it is far cheaper and cleaner to transfer the financial risk to an insurer and Yield are experts in helping our clients manage this. Along with appropriate insurance advice, we assist our clients to consider the questions they need to ask and agree between themselves, well in advance of anything bad happening. This way there are predetermined ‘agreed’ outcomes that put the business in the best possible position to transition from the loss of a key person in the short, medium or long term.


 
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KEY MAN INSURANCE

When a key person dies or is severely disabled, it can create immediate and long term financial problems for the business.

A drop in revenue is often inevitable when a key person is no longer there, however losses can also result while the business is searching for and training a suitable replacement.

When there is not a suitable replacement within the business, it can sometimes take a significant amount of time and money, to find and train a successor.

Key man insurance helps insure against this risk.


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BUSINESS EXPENSES INSURANCE

Business expenses insurance provides money to meet the businesses fixed expenses, in the event that you, one of your business partners or major contributors to the business revenue is unable to work.

When a business owner is not able to actively work in the business, it will likely have a direct impact on income levels, so in order to ensure the fixed costs of the business can still be paid, Business Expenses is a must have cover.


B)    LONG TERM ABSENCES (VOLUNTARY AND INVOLUNTARY)

All business partnerships should be underpinned by a clear buy/sell agreement to address the inevitable departure of a partner. This could be voluntary, such as when they want to sell down due to retirement or due to an involuntary departure, such as death or disablement.

In the case of the latter, the cheapest and most sensible way to underpin this agreement financially is usually insurance.

We have assisted many of our business owner clients to develop and prepare a buy/sell agreement and with advice on appropriate insurance protection.

We work in conjunction with Solicitor’s on the draft agreement and have solicitors we could recommend who specialise in this area. We have regularly facilitated meetings between our clients and the chosen Solicitor to ensure the end document is well considered and marries off with the chosen insurance solution.

We will help you define a suitable insurance cover level and structure it to work tax effectively for you, while providing flexibility. Each of these points are easily misunderstood or incorrectly implemented and we often find we are helping clients fix or improve aspects of their existing agreements when they think it is already in order.


BUY/SELL PROTECTION - LIFE INSURANCE

Life insurance for business owners is an inexpensive way of funding the buyout of a deceased business owner’s interest. This ensures the deceased’s family is adequately paid out for their estate interest in the business and allows the surviving business partners to affordably take over ownership of the deceased partner's share.

The reality is that if you do not have Life insurance for this purpose, with a buy/sell agreement expressing shared wishes to back it up, it is often not possible for the surviving partners to raise the funds to pay for the interest. Even when it is possible, it is often not how the surviving partners would prefer to use their finite capital and can result in financial duress. Furthermore, it can stretch out the process, when negotiations on value are worked through with the estate.

In the event that capital cannot be raised, it can result in the estate (usually the spouse) taking an active interest in the business which they may have no real understanding of.


BUY/SELL PROTECTION - TPD INSURANCE

TPD insurance is an inexpensive way of funding the buyout of a permanently disabled business owner’s interest.  In this situation it is as final as life insurance from a business perspective, as the disabled partner, must never be able to work again in the business, in order to meet the definition for payment.

In this instance, the desire to sever financial relationships is usually equally sought by the disabled party and the remaining partners. For the disabled partner, they no longer have any control over the success of the business and their share in the business can represent a large portion of their wealth. Therefore, it is usually preferable for them to cash out. Coupled with this, they will likely have a lot more expenses and other priorities on account of their disability.

For the remaining business partners, the insurance provides an affordable way to fund the buyout, so they can keep on with business as usual.

In the event that capital cannot be raised, it can result in the estate (usually the spouse) taking an active interest in the business which they may have no real understanding of.


Once the above is considered, personal insurance is vital to manage personal risk. Read about Personal Insurance cover

MAXIMISE BUSINESS VALUE

Having worked hard to build your business to this point, you have had to make compromises. It’s typical that as a business owner you’ve had to sacrifice personally to see your business prosper, but when it comes time to consider exiting your business, you want to realise the maximum value you can for your asset. 

At Yield Financial Planning we will help you understand how to do this. We work with our clients and related advice professionals to create a succession plan designed to maximise the business value and transition it in a timely way. We can show you how to apply tax exemptions that are specifically designed for small business owners that can result in no tax payable on sale.


STRUCTURING TO REDUCE LIABILITY RISK

 
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How you own your assets is extremely important for taxation reasons and to manage liability risk.  As a business owner, risks are naturally increased personally, as issues that can affect the business (with creditors, aggrieved customers or suppliers, solvency or even personal financial issues of a business partner), can result in personal liability risk.

Liability risk is the risk that you are sued or pursued personally and the threat that this applies to your personal assets like your home. In the context of your financial plan, we consider these issues for clients and where specific legal or tax advice is identified we work with you and your related advice professionals to help you minimise this risk. 

Insurance is one option you have to transfer some of this risk to the insurer, with professional indemnity and public indemnity cover and we work closely with general insurance experts that can help.

When helping you invest, we consider structuring advice and help you weigh up the pro’s and con’s of different structuring decisions, considerate of the tax implications and risk management. 


PURCHASING COMMERCIAL PREMISES THAT YOU WORK FROM

 

This is a strategy that can work fantastically well for self employed people who own or aspire to own the commercial premises they work from. Some of the advantages of this strategy include:

  • You are the tenant – unlike other commercial property purchases, you are not relying on demand from the market, to ensure your property remains rented. Considering commercial tenancy demand is fueled by the strength of the prevailing economy, there is a greater risk of low occupancy than residential property.
  • You can get more into your super fund – In this scenario you can theoretically make maximum pre-tax contributions to super annually, as well as paying in the rent you pay yourself.
  • You have some control over the rent you pay – within reasonable market limits you set the rent you pay.
  • You can buy it in a Self Managed Super Fund – if you sell your premises, once your super has been converted to a pension, it is possible to sell with 0% capital gains tax implications. This could naturally lend itself to when you are no longer in need of the premises for your business when you retire.