Protect, Plan, Prosper: Succession Strategies for Every Business

What would happen to your client’s business if they – or a key partner – couldn’t be there tomorrow? As an insurance broker, you’ve likely seen firsthand how a well-laid plan can mean the difference between continuity and chaos when a business changes hands. But for many business owners, succession planning is a “someday” task, often pushed to the backburner until it’s urgently needed.

Why Business Succession Planning Is Essential

Succession planning is the roadmap for how a business will continue to operate when the current owners or key people step down, retire, or face unforeseen events like sickness, injury or death.

Without a succession plan, businesses are left vulnerable to legal challenges, financial loss, and the risk of forced sales. Did you know, 42% of Australian businesses experience significant operational disruption when a key person dies or becomes disabled (Sensis Business Index). Yet, only 19% of business owners currently have a succession plan in place (Australian Institute of Company Directors).

Addressing business succession needs is becoming more important, especially with 60% of small business owners aged over 45 and many approaching retirement (Australian Small Business & Family Enterprise Ombudsman).

Overcoming Common Misconceptions

Many business owners mistakenly believe that succession planning is only relevant for larger businesses or that it can be dealt with “when the time comes.” Brokers are in a unique position to help debunk these myths and emphasise that all businesses, regardless of size, benefit from a well-thought-out succession plan. Unplanned events don’t discriminate by business size, and delays in planning can lead to significant disruption for staff and clients, financial strain and unnecessary stress.

Helping clients understand that succession planning is a proactive rather than reactive strategy can empower them to make informed decisions. It is a practical and cost-effective way to protect their business legacy, while helping to secure the future of their employees, partners, and families. Having these discussions also means that you fulfil your duty of care, showcase foresight and commitment to your clients’ ongoing success and are positioned as a “client for life” adviser.

Types of Succession Planning

There are two main types of business succession: planned and unplanned.

1. Planned Succession typically occurs when an owner or key person retires or steps down. With careful planning, this process can be seamless, allowing the business to continue with minimal disruption.
2. Unplanned Succession refers to when a key person(s) suffers an unexpected event like sickness, disability, or death. Without a plan, businesses may be left scrambling to fill roles, be forced to sell or even need to dissolve the business entirely.
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Cost-Effective Funding for Unplanned Succession

Unplanned succession can place a heavy financial burden on a business. This is where tools like key person insurance and buy/sell agreements become invaluable. These solutions provide a financial safety net, ensuring that if a key person can no longer fulfill their role due to injury, sickness, or death, the remaining owners have the funds needed to keep the business running.

Key person insurance, which uses a life insurance policy as the funding mechanism, is a particularly cost-effective way to provide the essential liquidity required during such a crisis. Unlike borrowing funds at a high interest rate during a time of crisis, key person insurance can provide funds quickly, enabling smoother transitions and better financial stability. Without such a safety net, businesses may be forced to sell or partner with someone who doesn’t align with the company’s vision or goals.

The Power of Key Person Insurance in Unplanned Succession

Consider a scenario in which two partners, Sarah and Mark, run a successful design firm. One day, Mark is diagnosed with cancer and must step away from the business. Without a succession plan or the financial resources to compensate for his absence, Sarah could be left struggling to manage operations alone, inherit Mark’s wife as her new business partner, or be forced to close the business.

However, if Mark is covered by key person insurance, the policy would provide the necessary funding to hire a replacement or cover the business’s financial obligations in his absence. Key person insurance turns what could be a devastating event into a manageable transition.

Legal and Tax Considerations

There are legal and tax implications to consider when setting up succession plans. Structuring a buy/sell agreement requires clear documentation of how ownership interests will be transferred, and all agreements must be carefully drafted to avoid disputes.

Tax considerations are also key. For example, capital gains tax (CGT) may apply when ownership is transferred. Life insurance proceeds from a key person policy could be subject to tax depending on the policy structure.

Where to Start with Succession Planning

Navigating the complexities of succession planning including tax implications, legal structuring, and funding requires specialised expertise. While clients rely on you as their primary adviser, partnering with a specialist like Steadfast Life ensures they receive robust, compliant and customised solutions.

Start a Conversation Today

With so few business owners prepared for the unexpected, brokers have a unique opportunity to add value by initiating these critical conversations. Succession planning doesn’t just protect a business – it preserves the livelihoods of those who depend on it – allowing them to keep their life on track. By offering insight and support, you’ll help clients secure their legacy and build lasting relationships.