Buy / Sell Insurance
What is it?
Buy / Sell insurance is the “funding” portion of a two step process in putting together a Buy/Sell Agreement between two or more persons for the orderly transfer of the portion of equity which currently belongs to each partner/shareholder.
The two steps:-
Funding – a method other than cash or borrowings used to purchase the other parties equity in a business.
Unlike a sale in the ordinary course of a business, the continuing proprietor might be unable to raise the necessary finance to buy his partner in the event of a major insurable event i.e.
- Total & Permanent Disability
- A medical condition (Trauma) not resulting in Death or Total & Permanent Disablement.
This is the legal agreement between business proprietors dealing with the orderly transfer of equity in the event of, for instance, death, disablement or critical illness.
Buy/Sell contracts are usually prepared by lawyers and reflect the inter-relationship between business entities and the principals, the insurance needs, the value of the business and the equity position and the terms under which any transfer of equity is triggered.
Why do I need it?
At some stage of a business an event will occur (apart from bankruptcy or exit) which will result in the requirement of business partners to raise capital to effect a buy-out of the outgoing partner.
This is done either by:-
- Raising Capital
- Funding the buy-out by insurances.
How much cover do I need?
This is normally calculated in a joint discussion between a Business Valuer, the Accountant, the Partner and the Insurance Broker