Welcome to the August 2022 edition of FC Viewpoint.

IN THE NEWS:

• The JSE All Share Index increased from 67 652 on 21 July 2022 to 69 719 on Friday 20 August 2022.
• 1 US Dollar will cost you R16.99; 1 Pound = R20.03 and 1 Euro = R16.95.
• Annual consumer price Inflation is at 4%.
• The prime lending rate in SA is 9% per annum.
• The price of Oil is $93 per barrel.

SLIDE OF THE MONTH: THE JSE in 2022 compared to the JSE YTD in 2022

Business owners have need to ensure that there will be a continuation of the business upon the death or disability of a co-owner. They further want security in knowing that the disposal of their business interests will be dealt with in an orderly manner.

The risks upon the death or disability of a co-owner

• The remaining owners may not have sufficient cash available to buy the deceased’s business interests.
• The heirs do not have the security that they will be paid a fair price for the deceased’s business interests if sold in the open market.
• The remaining business owners may not have immediate and clear ownership of the business, and negotiating with heirs or delays relating to winding-up of the estate might complicate matters.
• In funding the purchase of the deceased’s interest, the capital resources of the business might be drained, jeopardising the continuation of the business.

The solution

The co-owners of the business enter into a buy-and-sell agreement. Upon the death or disability of one of the them, the remaining owners buy the deceased’s business interest at a pre-determined price. The purchase price is funded by life insurance policies affected by the co-owners on each other’s lives.

Benefits for the co-owners

• The seamless continuation of the business is ensured;
• No outsiders will be involved in the business and they can continue unhindered; and
• The funds are available to ensure that the transaction can be concluded swiftly.

Benefits for the dependants/beneficiaries

• They will inherit a capital amount instead of an interest in a business they have no knowledge of;
• The capital received can be invested to replace the loss of income experienced; and
• The capital can assist with the overall estate planning of the co-owners and their families.

The structure

There are two structures that can be considered when implementing a buy and sell arrangement. It will be illustrated by using the following example:

A, B and C are shareholders in the company ABC (Pty) Ltd. A owns 40%, B 35% and C 25% of the shares in the company.

The parties wish to enter into a buy and sell arrangement and would like to insure each other’s lives for this purpose.

Traditional Structure

The traditional structure entails that each shareholder has one policy on his/her life with the remaining shareholders being the co-owners of that policy. In the above scenario this will result in the following structure:

The ownership of the policy will be according to the proportionate shareholding of each shareholder.

Alternative structure

The alternative structure is generally used where there are a larger number of shareholders and also provides for ease of administration when accounting for the premium payments. It entails that each shareholder owns one policy on the lives of all the other shareholders. In the above scenario the structure will be as follows:

The sum insured on each life will be equal to the proportionate sum that is required by that policyholder to purchase his/her proportionate share.

TO CONCLUDE

Are you a business owner? Let us assist you with your business continuity planning and buy and sell agreements. We assist with the contractual part as well as the life cover policies to fund it.

QUOTE OF THE MONTH

“That man is richest whose pleasures are cheapest.” – Henry David Thoreau

Wealth regards,

Fanie Jansen Van Vuuren CA (SA), CFP®

Director: FC Wealth and Investments (Pty) Ltd

E: fanie@fcfin.co.za  |  T: 083 384 5868

W: www.fcfin.co.za