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Why Buy-and-Sell Cover ensures sustainable succession planning

25 November 2021 Motshabi Nomvete, Technical Marketing Specialist at PPS

Managing a business always has inevitable challenges, risks and uncertainties that could impact its financial sustainability. Your business is your primary and greatest investment, physically, emotionally and financially as it funds and directs your and your family’s accustomed lifestyle.

Having the right Business Assurance cover replaces uncertainty with certainty by guaranteeing financial liquidity no matter what the future may hold and is instrumental in any succession planning process.

In the event of death or disability of someone with direct ownership in your business, it is vital that provision is made for the sale of the deceased’s portion of the business and that sufficient funds are available to the survivors to purchase the deceased’s interest to ensure the continuation of the business. This also gives the business an alternative to buy the shares with ongoing profits of the business.

A component of comprehensive Business Assurance is Buy-and-Sell cover. This guarantees the stability and continuity of a business in the best interest of employees as well as creditors. The risk of not having Buy-and-Sell cover is that a business can be drained of its capital resources or have unskilled family members get involved which could contribute to running down the business.

Buy-and-Sell cover requires two key components:
1. There must be a buy-and-sell contract in place, facilitating the sale (and purchase) of a share in the event of death and/or disability; and
2. There must be cover in place to provide the necessary funds to fulfil the buy-and-sell contract.

The key to understanding Buy-and-Sell cover lies in understanding what could happen to a business should an owner pass away:
• The business will be interrupted.
• The executor of the deceased estate will take the place of the deceased owner from a legal point of view and will take part in the business for the benefit of the estate as long as the interest is still in the deceased estate.
• The administration of the estate takes months to reach the point where the interest can be sold.
• The heirs and family will be in mourning and will, under most circumstances, need cash to support themselves.
• There is a high possibility of conflict between the heirs and the surviving owners due to different needs.
• The heirs could possibly inherit the interest and enter the business or the executor must sell the interest, possibly at a lesser value than what could have otherwise been received.
• Should an option to buy exist, it is possible that the surviving owners did not build up the necessary funds or the funds are not enough to buy the interest.
• The possibility of an unskilled/incompatible person(s) entering the business due to inheritance or a forced sale becomes high.
• It is possible that the clients of the business could notice trouble experienced which could impact client retention.
• It is also possible that the business could be drained of capital and available cash.
• In the end, it is possible that the strain on the business is too much, thereby causing a total dissolution thereof, resulting in great losses for everyone.

By implementing a complete buy-and-sell solution, business owners can rest assured that the business will benefit as follows:
• A guaranteed buyer and guaranteed price for the interest of each party is provided in the event of the party’s death. This provides a reasonable value for the deceased’s interest, thereby eliminating uncertainty for the heirs.
• It creates ready cash which can be used on the death of the deceased to purchase the deceased’s interest in the business.
• The surviving parties are ensured outright ownership of the business.
• It guarantees stability and continuity of the business and also ensures the goodwill of employees and creditors.
• A whole or a portion of the purchase price can be provided for the deceased’s interest.
• Full ownership by the surviving partners is guaranteed at a predetermined price/valuation method.
• A dispute among the heirs is eliminated.
• It guarantees a reasonable price in cash for the heirs which is paid without delay.
• Where no other surety agreements were signed, it relieves the deceased’s personal estate of all liabilities and obligations towards the creditors of the business. It also prevents the business from being drained of its capital resources.

If you want to ensure the longevity of the business you established – whether it passes to a co-owner or is sold as part of your legacy – having the right Business Assurance solutions with the exact coverage required by most businesses is a no-brainer when you are structuring your overall business protection strategy. These should, in addition to Buy-and-Sell cover, include Key person cover, contingent liability cover and credit loan account cover to manage any eventuality a business will face.

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QUESTION

The second draft amendments to Regulation 28 will allow retirement funds to allocate up to 45% of their assets to SA infrastructure, with a further 10% for rest of Africa; but the equity & offshore caps remain unchanged. What are your thoughts on the proposal?

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Infrastructure? You mean cash returns with higher risk!?!
Infrastructure cap is way too high
Offshore limit still needs to be raised
Who cares… Reg 28 does not apply to discretionary savings
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