Fifteen years ago, Len and Karl established a winery in Margaret River WA. While Karl is the expert winemaker, Len is the one who generates sales and controls the finances They are equal partners and are both shareholders and directors. Over the years, they’ve each put in $500,000 to the business to help fund growing capital requirements. The business also has a bank loan of $2 million used to increase plantings and install a hitech bottling process. They think the business is worth around $10 million.
With profits increasing, Len and Karl decided to see a Financial Adviser. Being able to show how much each of them was worth to the business was useful, and therefore how much the business would suffer if the other were no longer around. They agreed that they would incur significant losses in revenue and possibly contracts as well as replacement and training expenses.
They reckoned that they needed $500,000. To cover this as well as another $500,000 to repay the loans they had made to the business. The families made it clear that in the event of something happening to Len or Karl’s they had no interest in remaining in or running the business. Both Len and Karl hoped that each would receive fair market value for their share should something happen.
Key person cover was proposed. Insuring Len and Karl each for $3 million. Which would protect each other's interest in the business and provide capital to the deceased's estate, all without having to sell business assets or try to raise funds from a bank?
The key person cover also covered off what would happen to the business.
The arrangement provided for Len and Karl to:
- Efficiently transfer the departing owner’s business interest to the remaining partner following a specified event such as death or disability
- Ensure the departing owner (or their family or estate) receive fair market value for their share of the business.
In considering these business risks early, both Len and Karl are making sure that if something happens to either of them, the business, and their families, will remain financially secure.
