Every business should have a plan for what happens if one of its owners dies, becomes totally and permanently disabled, or suffers a serious illness. Without a clear plan in place, an unexpected event can cause major financial and operational disruption for both the business and the families involved.
A business often depends on a few key people to drive profits, provide capital, or manage operations. If one of them is suddenly unable to continue, it can leave surviving owners and their families facing financial hardship – and the business itself at risk.
What is business succession planning?
Business succession planning is the process of preparing for the orderly transfer of ownership and control when a triggering event occurs. It helps protect the interests of all shareholders and ensures continuity for employees, suppliers, and clients.
Without a structured succession plan, common issues can include:
- The estate of a deceased owner making excessive demands on the business
- Family members insisting on involvement or control without the necessary experience
- A forced sale or wind-up of the business to pay out the departing owner’s estate
- Remaining owners working to generate profit for a non-active shareholder
- Increased debt or depletion of assets to fund an unplanned buyout
- Loss of confidence among lenders, suppliers, and customers
A robust succession plan should include a Shareholder Agreement (often referred to as a buy/sell agreement) outlining what happens when a triggering event occurs. It acts like a “will” for the business and:
- Is binding on all parties
- Provides security to key stakeholders
- Preserves the value and stability of the business
How is a business succession plan funded?
Once a shareholder agreement is established, the next step is to determine how any ownership transfer will be funded. This typically leads to a discussion about business insurance.
Insurance can provide the liquidity needed to fund the purchase of a departing owner’s share, ensuring that the business continues without financial strain. When reviewing insurance options, careful consideration should be given to:
- Who owns each policy and how premiums are funded
- The tax implications for each ownership structure
- The timing and process for payouts
There is no one-size-fits-all solution – each ownership structure (partnership, trust, or company) requires tailored advice to achieve the best outcome.
Why business insurance is essential
Business insurance is a form of risk management that protects the business against unexpected events that could threaten its survival.
There are three ways an owner might leave a business:
- Involuntarily – due to sickness or injury
- Permanently – due to death or disablement
- Voluntarily – through planned retirement
While retirement can be anticipated and managed, sudden illness, injury, or death can have devastating consequences. Business insurance ensures that, if the worst happens, there’s funding available to:
- Buy out the departing owner’s share at fair value
- Maintain business operations and meet obligations
- Provide financial security for the owner’s family
Common question: How much business insurance is enough?
There’s no universal figure – it depends on the business valuation, debt level, and the contribution each owner makes. A professional advisor can help determine the right level of cover for your business and structure it appropriately.
Key components of a business succession plan
A comprehensive succession plan should:
- Establish the fair market value of the business and each owner’s share
- Include a detailed buy/sell agreement defining trigger events
- Specify the process for valuing and transferring ownership
- Identify funding mechanisms such as insurance, savings, or loans
- Clarify ongoing roles and responsibilities of surviving owners
When combined, these measures create clarity and protect the long-term viability of the business.
Why seek professional advice?
Business succession planning and insurance involve complex financial, legal, and tax considerations. Missteps can lead to disputes, liquidity issues, or unfavourable tax outcomes.
Working with a qualified financial advisor and accountant ensures that:
- The structure of your insurance and agreements is compliant and efficient
- All parties understand their obligations and rights
- The business remains stable and well-positioned to continue operations
Professional guidance also helps address frequently misunderstood areas – such as who should hold the insurance policy, how premiums are treated for tax purposes, and how proceeds should be distributed in line with ownership interests.
Where to from here?
If you don’t have a succession plan, now is the time to start. And if your existing plan hasn’t been reviewed in the past few years, it may no longer reflect your business’s current structure or value.
At LDB, our experienced accountants and financial advisors in Blackburn, Melbourne, can help you review or establish a business succession plan that protects your assets and ensures continuity for your team, shareholders, and family.
Call us today on (03) 9875 2900 or get in touch online to discuss how business insurance and succession planning can safeguard your business.
Or you can follow LDB on LinkedIn for updates on business strategy, tax, and financial planning advice.
