At Bekker Investments we will advise on Tax efficient structures that will insure your business interests. Professional structuring of Buy and sell agreements and Keyman Insurance will ensure that business continuity is no longer a concern for its owners.

Being Independent, we at Bekker Investments are able to get our clients the most appropriate, most cost effective solutions to their Business concerns.

From a company’s perspective, corporate planning involves formulating long term business goals so that the strategic planning of an enterprise may be developed and acted upon. The corporate planning term that was popular in the 1960s has since been referred to as strategic management.

Key Man Insurance

Does Your Business Need It?

Key man insurance minimises business risk on death or disability. Owning and managing a business is not a task for the faint hearted. Risk and assurance issues are often overlooked, such the death or disability of a key employee, and the death or disability of a shareholder.

Financial pressure will result from the loss of a key person by way of loss of income due to specific knowledge lost, additional costs incurred to recruit and train a replacement, and loss of goodwill as customers may be less inclined to deal with a new incumbent. Key man insurance can help to ease this.

In the event that key individuals have signed surety on credit facilities, their estate is at risk as the bank may call up the facility in the event of death due to the amount of liquidity in the estate and their ability to recover. In this case, it is sensible for the directors to insist on surety cover in event of their death in order to cover their liability.

A key man insurance policy is usually owned by the company, on the life of an employee, with the proceeds being paid to the company in the event of the employee’s death or disability. While this is not the only structure available, it will result in the premiums being tax deductible and the proceeds being taxable. Any losses or expenses incurred due to the demise of the key person would usually be tax deductible. An alternative would be to make the premiums non-deductible, making the proceeds non-taxable. It is important that these are structured properly at the outset, as there are also capital gains tax and estate duty implications if you get it wrong. The effects of cession of these policies between parties can also become complex. Contact one of our Financial Advisors to discuss the merits with you on a case-by-case basis, and help you structure the policies correctly.

Definition of ‘Buy And Sell Agreement’

An approach used by sole proprietorships, partnerships and closed corporations to divide the business share or interest of a proprietor, partner, or shareholder. The owner of the business interest being considered has to be disabled, deceased, retired or expressed interest in selling. The buy and sell agreement requires that the business share is sold according to a predetermined formula to the company or the remaining members of the business. Before the interest of a deceased partner can be sold to the company or remaining partners, the deceased’s estate must agree to sell.

Buy & Sell Cover

Business owners often have the majority of their wealth tied up in their businesses. They need to know that in the case of their death, the remaining shareholders will be able to pay a fair value to the deceased estate for the deceased’s share in the business. As this shareholding may be significant, it may be impossible for the existing shareholders to access sufficient capital at short notice. Without any capital provision, new shareholders may need to be sought in order to purchase the deceased’s share of the business. This may be against the wishes of the existing shareholders. Buy-and-sell assurance enables existing shareholders to purchase the interest of a deceased or disabled shareholder at a fair value. This ensures business continuity.

There are two parts to a buy-and-sell agreement. One is the insurance policy on the life of the shareholder, and the other is a written agreement between the shareholders setting out the agreement to pay the proceeds to the deceased’s family or to the disabled shareholder. Besides formalizing the agreement between the shareholders and setting out the intention for the surviving shareholders to purchase and the deceased’s intention to sell, the agreement also needs to deal with the valuation of the business.

Buy-and-sell assurance should be structured correctly at the outset. The appropriate level of cover required by each shareholder on the lives of the other shareholders must be calculated based on the shareholding percentages and the valuation of the business. Bekker Investments can facilitate discussion with the shareholders and work with your attorney in drawing up a suitable agreement.

Buy and sell policies can also be structured in various ways but it is most common for the policies to be owned by the various shareholders on each other’s lives. This means that the premiums are not tax deductible but the proceeds, when received, are tax free and exempt from estate duty. You may wish to review your existing arrangements with our professional team.

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