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Business succession planning

Understanding the needs of business owners and their families

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Partnership or

shareholder

cover:

Establishing

needs

Protection for:• The business’s future

– Control in the right hands

• The partner or shareholder’s family– Making sure the right people have the cash at

the right time

An opportunity for advisers to develop professional connections

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As firms grow, the risk of one employee dying can become significant

Risk of one death before age 65

Source: England and Wales Life Tables, 2011Percentages based on average life expectancy for male and females at these age ranges

1 2 3 4

30 11% 21% 30% 38%

35 11% 21% 29% 37%

40 10% 20% 28% 35%

45 10% 19% 26% 33%

50 9% 17% 24% 30%

Age

Number of employees

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Determining the destination of your business assets

Without Business Protection:

• Peter Nichols’ shares pass to his wife Paula Nichols

» Shares

• David Smith and Brian Jones are the surviving directors

• Lose total control of Peter’s share

• Can they afford to buy the shares?

• Will Paula sell her shares?

• How will the bank react?

The “Company Will”

The surviving directors could potentially lose control following the loss of one of the business owners

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Business

succession: the

problem

• Not an exact science, different valuation methods

• No established trading markets for private limited company shares

• Rights attaching to shares

• A controlling or minority interest?

• Not freely marketable

• Prevailing circumstances

• How big a cheque would I have to write today?

• Company auditor should be consulted

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Business

succession – sole

traders

• Really a question of family compensation

• Business owner takes out a policy on their own life

• Written into trust for the family

• For one person family limited companies, consider a Relevant Life Policy

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Business

succession –

partnerships

Flexibility is essential for larger arrangements

• Each person takes out a policy on their own life

• Written into trust for the remaining partners or shareholders

• A business trust allows for future changes to the business structure to cope with new or retiring partners and even incorporation

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Business

succession –

limited companies

Flexibility is essential for larger arrangements

•Each person takes out a policy on their own life

•Written into trust for the remaining partners or shareholders

•A business trust allows for future changes to the business’s structure

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An example: NSJ Ltd

Arranging the policies

Policy A

Business Trust

Life assured

Potential beneficiary

Potential beneficiary

Potential beneficiary

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A purely commercial arrangement…

How is partnership or shareholder cover set up?

Policyholder/owner Partner or shareholder

Life assured Partner or shareholder

Who gets the benefits? Trustees, for the beneficiaries

Written in trust? Yes, business trust

Company or partnership involvement

None

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Cross option

agreements:

Ensuring fairness

for all concerned Price

Market value: fair but keep cover up-to-date

Specified value: certainty but needs review

If one side exercises option other side is bound

Option to continuing partners/legal personal representatives

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Shares

Cross-option agreement

Will

Providing certainty for all parties

The cross option agreement

Life cover

Shares Cash

Death benefit

David Smith and Brian JonesPeter Nichols

Paula Nichols

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Business

succession

planning:

Summary

Essential ingredients

• Cash

• Control

• Compulsion

• Certainty

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VitalityLife for

shareholder and

partnership cover

• Disability Cover for Business tailored to the needs of the modern business

• Guaranteed Insurability Options to cater for the growing business

• Local face-to-face support

• Specialist business protection team

• Financial Strength: AA rated by Standard & Poors

• VitalityLife business is written through the Prudential Assurance Company Ltd (PAC) benefiting from the scale, diversity and solvency of PAC

*Current rating by Moodys and Standard & Poors at Jan 2015

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Thank you