BUSINESS CASE STUDIES

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1 BUSINESS CASE STUDIES Below you will find 2 Case Studies of 2 very different organisations. An small Advertising Firm; & a well established Construction Equipment Hire Business. Most business owners have established a business or bought into a company to have something more than an income to build an Asset and this asset needs to be protected. Along with our strategy in protecting a business and its owners is our consideration for the tax consequence of any potential claims payout in the future. We will not discuss these below, however we will always work with our clients accountant to ensure the most appropriate levels of cover and tax planning. ABC ADVERTISING A two partner advertising firm in town established The firm has 6 full time staff, 2 part time staff and has recorded significant growth in the past 3 years. ABC has moved from a home office setup 3 years ago, to landing several larger accounts and moved to a trendy studio office in the heart of the city. Revenue has risen from $300K to $1.2mill over this 3 year growth period. Although revenue has risen in leaps and bounds, profit remains minimal. The additional turnover coming into the firm has been spent on significant marketing, support staff and the new office premises. Business Value Although profit is slight, the two owners have been through the pains of establishing a business from scratch and have both agreed that due to the business profile/goodwill, as well as some of the contracts ABC has picked up, the value of the business is $600,000-50% Share between the two owners. Business Income Producers Each of the two owners produce $500K revenue for ABC, and a Junior Account Manager brings in $200K per annum. Business Debts ABC owes the two partners $80K each; however has no outstanding loans to any financial institution or third party.

2 The Strategy Ownership Protection (Business Buy/Sell Insurance) We propose the two partners have a $300,000 Life & TPD (Total and Permanent Disability) Insurance Policy. In the event of their Death (or TPD), the estate would receive a $300,000 payout for their share in ABC. This would ensure the following;w The estate receives a prompt distribution of their rightful share in the asset that is 50% of ABC; The remaining partner would inherit the deceased partners share in the business; The remaining partner will not have the painstaking requirement of trying to raise funds to payout a deceased partner. Would a lending institution lend to a business where one partner has passed and where there s uncertainty regarding the business continuation? If the partner can t borrow the money, could they sell the business? Would it be worth the same value as prior to the partner s death? In this time of sadness, this uncertainty is never welcome. A minimised interruption to ABC. Key Man Cover - protecting revenue With little profit and high fixed overheads, there is a significant risk to the business continuation if one of the three income producers were unable to work due to major illness, disablement or death. ABC would certainly require a Key Man Policy on both partners, protecting the $500K revenue they produce. A Life, TPD and Critical Illness Insurance Policy would be implemented to protect the business and ensure that in the circumstance of one of these unforseen events occurring, the business, its value, its future and its staff are protected. How could the business continue if it were to lose one of these income producers? Even if they were unable to work for 12 months due to illness, how could the business survive? No doubt ABC would insure its office contents, motor vehicles, etc...are these the most important assets ensuring the businesses survival? A lesser priority would be to protect the Junior Account Manager. $200,000 revenue protection may or may not be crucial to the business continuation, however this would most likely depend on the partners personal debt position, their current workload and the other staff within the business and whether they could pick up the slack. Key Man Cover - protecting debt Fortunately for ABC, their only outstanding liability is $80,000 to each partner. If either one were to suffer death or disablement, the BUY SELL AGREEMENT would trigger a buy out of their share in the business, and therefore this loan would most likely be immediately called. It would certainly be recommended that we look to protect this exposure in our strategy, and due to the small sum owed, the relative cost would be minimal. This is a simple risk strategy we would develop with ABC and their accountant. The consequences of not having this type of cover and the repercussions of not having this strategy in place in a time of need are certainly not simple.

3 XYZ Equipment Hire XYZ Equipment Hire has 3 directors and equal shareholders, and was established in Dean & David are the hands on managers and the key drivers of the business on a day to day basis. A gentleman named Glen is the third director/shareholder in XYZ Equipment Hire. Glen has no impact on the business from a day to day perspective; however brings strong financial backing to XYZ. The Directors Personal Position Dean 3 kids, a family home with minimal equity and a small amount of savings; David 1 child, a unit with approximately $300K equity and a wife working part time in retail. Glen 2 kids, large share portfolio and several millions of dollars in equity in real estate. The Business Operations Over the past 10 years the business has built up slowly but surely. Every year s profits are put back into the business and used as deposits on the purchase of more equipment units for hire. XYZ now has some 55 units for hire to clients and the public. All units are depreciating assets and like any rental business, the equipment is not often well looked after. Dean is in charge of the marketing, and building relationships with construction firms. David managers the 12 staff members employed by XYZ; controlling the equipment returns, deliveries, mechanical work and repairs, preparation of equipment for rehire and direct hire to the public. It is believed that both Dean and David s roles are of equal importance and value to the success of XYZ. The Financials Turnover $4,500,000 Net Profit $325,000 Equipment Finance monthly cost - $71,000 (or $852,000 per annum). XYZ Accountants Valuation - $1,200,000 The Strategy Ownership Protection (Business Buy/Sell Insurance) Our first priority would be to ensure that in the event of one of the three partners suffering death (or disablement) their estate would receive what is rightfully theirs. As each party owns a 1/3 of XYZ, we will insure each of them for $400,000 Life and TPD. *** Refer to 1 st Case Study ABC Advertising for the benefits of Buy/Sell Insurance coverage.

4 Key Man Cover Our second objective is to ensure the continuation of XYZ. Many decisions in the past 10 years of operating XYZ have been made upon the assumption that the business will continue. This assumption is relied upon by the staff, creditors and the owners. It is vital that we protect this continuation as best we can. Key Man for Revenue purpose; From our discussion and risk analysis with the directors, we know that approximately 50% of the revenue derived by XYZ comes from Dean and David. If something were to happen to either Dean or David, some other staff members may be able to contribute, however it is best estimated that XYZ s revenue would decrease by 30% in year 1. It is important to remember that business decisions have been made upon the assumption of business continuation. i.e. staffing, equipment purpose, office rental, borrowing etc. Not to mention directors, their drawings and the subsequent mortgages and living expenses. What will happen to XYZ Equipment Hire if Turnover drops by 30% in the next financial year? The answer is to ensure that we best protect the business and its owners from this occurring. Two x $1,350,000 Key Person Policies would be established for Dean and David; protecting the business from their death, disablement or critical illness. This money would be paid to the business immediately upon diagnosis, as a lump sum, and provide XYZ with the best possible opportunity for continuation. Key Man for Debt purpose; We know that Glen is a silent partner, and does not contribute to the business day to day operations; however his death, disablement or critical illness may have a dire effect on the continuation of XYZ. XYZ s Equipment Finance has been approved on the basis of business continuation and the directors personal guarantee. With $71,000 of monthly finance commitments secured against depreciating assets, it would be unlikely that XYZ s lenders would be comfortable without Glen s personal guarantee. If he were to die, it is common for a lender to review their lending and reduce their exposure. This may mean drastically reducing the Equipment and XYZ s borrowings. This in itself may have a crippling effect on the business profitability and value. This possibility can and should be protected. *** In the event of Glen s death and assuming XYZ Equipment Hire had no strategy for the above or Insurances in place; what would happen? If the business is valued per above, how would Dean & David come up with $400,000 to buy out Glen s family? How would they then satisfy the bank and its exposure? Would this then damage the value of XYZ Equipment Hire that Dean and David have been building up for the past 10 years? Without planning comes uncertainty.

5 EXAMPLES OF OTHER BUSINESS S & RISK INSURANCE Risk strategies are tailored to suit our clients and their risks. We pride ourselves in ensuring that our clients have the Insurance cover that is necessary to meet their needs. We have protected; Property Development Firms Protecting exposure that exists with project managers and their knowledge in the business; and project borrowings. Law Firms Ownership/partner protection Management Consultants Both revenue and ownership protection Civil Construction Firms Both revenue and ownership protection Each and every business with a value and a revenue should at very least be provided with Risk Insurance Options. MBS Insurance will provide EXPERT ADVICE and a SIMPLE strategy to protect your business and the business continuation. The Risk process is often preconceived to be a complicated process, however as our clients soon realise, this VITAL process is far from complicated with EXPERT ADVICE, EXPERIENCE and ONGOING MANAGEMENT.