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Business Continuation

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Business continuation planning is the process of identifying risks that may imperil your business, such as the death or disability of a key employee or owner – and adopting risk management strategies to minimize, eliminate or transfer these risks.

A business usually represents a source of current income for many business owners; the value of the business through a sale usually represents a primary source of income in retirement. Business continuation strategies are therefore critical.

Shareholders’ Protection

What happens if a co-owner becomes disabled or passes away, and their will or trust passes their shares to another person, such as their partner or even a complete stranger? This new person may end up on your board of directors, and may not add much value, yet drain company profits and take income or dividends. Usually this other party does not particularly want the shares; however, they do need the income. Often, they would welcome the cash equivalent and, in reality, you want the control and value of your company.

In cases such as this, a Buy-Sell agreement can work to your advantage. This is a binding contract between you and your co-owners that stipulates when an owner can sell their interest, who can buy an interest and what price will be paid for that interest.

Other than borrowing money, selling assets or using cash, an insurance policy can be a cost-effective and preferred solution. Its premium is normally a small percentage of the comparable costs of the other funding strategies, and its benefits can be controlled through trusts or various vehicles on behalf of all parties. Such a scheme is not only cost effect, but also provides needed funds on time. Life insurance proceeds are tax-free, and the company can re-purchase shares in pre-tax dollars.

Key Persons Insurance

While most business owners understand the need to protect against unforeseeable risks related to their capital assets – fire and theft coverage being examples – risks relating to another key asset, human capital, are often overlooked.

Key person insurance protects a business from the adverse effects of losing a key Person through death, total and permanent disablement or trauma or critical illness. Key person insurance is often required by investors in a business when one or more individual people are important to the success of the venture. In other words, it is critical when the investors realise that the death or disability of a key person could effectively destroy the value of their investment.

Under key person insurance, if that key person dies or becomes disabled, the corporation can receive the proceeds as the beneficiary of the insurance policy. The funds are then available to the business, which can use the funds to overcome the loss of the services of the key person, or to distribute to the investors upon the dissolution of the corporation.

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