September 12, 2023

Business Succession – Exit Strategy

Business Succession Financial Planning

Private company business succession is common as emerging business leaders naturally progress to take the reins from their forebears. It’s also complex and multi-faceted with successful succession relying on thorough planning and careful consideration of a broad range of what-if scenarios including a clear exit strategy.

In this article, we explore buy/sell insurance considerations should one or more business partner be unable to continue in the business due to illness, accident, incapacity or death.

While I’m sure the 19th Century American poet who penned “Great is the art of the beginning, but greater is the art of ending” ¹ didn’t know a great deal about business succession, but he was right on the money when it came to understanding the need for an effective exit strategy.

I was recently called upon to consult on insurance requirements necessary for a proposed multi-million-dollar business succession for junior business partners seeking to acquire the major shareholding of a privately owned consultancy.

Initially I worked through an education process that served to create a two-way exchange of information.

The goal was to inform the acquiring partners of the overarching premise of insurance and by return, understand the requirements of the sale transaction in context of the various scenarios that could affect each partner personally and their business as a whole.

This information exchange resulted in all agreeing to implement buy/sell insurance as part of a carefully formulated buy/sell exit strategy which was also a requirement of the financier.

Generally speaking, buy/sell insurance is used to claim funds for the purpose of purchasing an exiting partner’s shareholding in a business.

This allows the remaining business partners to retain control of the company while providing the agreed financial benefit to the exiting partner or their family/estate, if they pass away.

In the absence of such an arrangement, it could be possible for a deceased partner’s shareholding to pass to a family member or other beneficiary with no experience or appropriate skill to run the business. As you can imagine, this could have serious business, operational, legal and financial implications for the future of the business and its business partners.

There are a range of payout options available to a business in buy/sell circumstances.

Among them, the opportunity to purchase the exiting partner’s shares as soon as possible following what’s known as a ‘trigger event’.

The trigger could be a critical illness, disablement or death.

This option is usually to the advantage of the exiting partner or their bereaved family members who are usually motivated to settle arrangements quickly as they may need funds to meet personal medical care or lifestyle requirements.

However there are considerations for the remaining business partners and these can include the timing of when payments are made from an insurance perspective and a buy/sell agreement perspective.

For example, in a case of disablement, how long the partner needs to be unable to work in the business to trigger the buy/sell agreement could differ from how long the insurance company requires the insured partner to be disabled before an insurance claim could be made.

Appropriate outcomes require a collaborative effort and there are almost always complications relating to buy/sell insurance circumstances due to the insurance cover amount being several million dollars for each partner. This is to be expected, as mining and resources businesses often have a very high value.

Fortunately, extensive knowledge of insurance products and strong relationships with leading insurers counts for a lot.

Knowing the majority of insurers have caps well below the cover amount required, and armed with a clear brief of requirements I was able to streamline the process and focus on insurance industry leaders with capability.

The policy recommendations received from short-listed insurers were carefully assessed with policy definitions closely scrutinised in context of claim requirements for each, and all partners, to enable an insurer and insurance product to be selected.

Buy/sell insurance applications for multi-million-dollar business partner policies involves numerous medical tests.

These can, and often do, reveal health issues and higher risk lifestyle activities which can result in insurance applications being offered with loadings, exclusions and in some cases, the application is declined.

This can create new challenges that must be overcome to finalise insurance arrangements so the buy/sell legal agreement can be drawn up by lawyers.

My role included liaising with the partners’ legal professionals throughout the process and to ensure legal advice and documentation was considered in light of the insurance cover and associated insurance definitions in alignment with the desired outcomes of the buy/sell legal agreement.

The business’ accountant also needs to be involved in the earlier stages of a buy/sell process to determine the appropriate structure for holding the partners’ insurance policies.

Further, accountant involvement is vital for ensuring the method for tax effectively transferring shares and buy-out funds in the event of a partner exiting under buy/sell trigger event condition, is well considered, agreed and implemented.

Importantly, the conditions of the partners’ buy/sell agreement also influence the contract of sale between incoming and exiting business partners, as the financier requires the buy/sell insurance policies and buy/sell agreement to be in place, before funding the acquisition.

As I said at the beginning, it’s complex.

In my experience, successful succession particularly in the mining and resources sector is usually defined by paying close attention to significant details such as buy/sell insurance arrangements which play an important role in a well-considered buy/sell agreement and exit strategy.

As illustrated here, achieving successful succession involves collaborating with experts who are willing to share their knowledge and experience for the purpose of achieving the best possible outcomes for the partners and informed advice the keeps the process moving smoothly towards a timely completion of the business sale transaction.

In this case, my knowledge of insurance and relationships with insurers determined the most appropriate buy/sell insurance arrangements which enabled the lawyer to draw up legal agreements and the clients’ accountant to implement tax effective structures for funding and holding the policies and managing the share and funds transfer in a trigger event.

Collaboration and a commitment to integrated solutions for complex matters is a Resources Unearthed fundamental method of operation and for the past decade that approach has enabled mining and resources business owners, professionals and executives to achieve business goals and personal aspirations.

In our next article, we consider the legal matters that can impact successful succession.

To learn more about buy/sell insurance arrangements and other financial considerations for partners involved in business succession, please contact James Marshall on +61 (0) 7 3007 2000 or email

To learn more about James, visit this link.

Resources Unearthed is a solutions hub that provides integrated financial, legal, property, accounting, tax and business advisory services for executives, professionals and business owners in the mining and resources sectors.

Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth ABN 54 139 889 535 AFSL 357306. This advice is general and does not take into account your objectives, financial situation or needs. You should not act on it without first obtaining professional financial advice specific to your circumstances.

*Please note: For advice and services relating to this matter that are not offered under the Fortnum Private Wealth AFSL, in accordance with our collaborative advice model, when required, such matters are referred to appropriately qualified professionals.


¹ Henry Wadsworth Longfellow

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