Essential reading for all small to medium sized business owners. Your business is your main asset, but what happens to it and your family if you become seriously ill or pass away? Few have thought of this, fewer still have done something about it!

1. Business Continuity Planning
Risks and solutions for business owners
and investors

2. 1
The risks
What would happen in the case of an unexpected and dramatic event such as the death of
one of the owners or directors?
 Who would shares be transferred to in the case of death?
 How much control would be lost?
 What happens to the business in the case of critical illness?
 How would the value of the business (and therefore the investor’s asset) be affected?
 What action would dependents of the owners take?
Should this happen, is your business protected?
It is common for directors to focus on growing the
business, staying competitive and dealing with economic
risks. Many, however, do not consider the likelihood of
unexpected and dramatic personal circumstances and
how these might impact on the business – and indeed
their families. These risks are real and cannot be ignored.
Source: see table in reference notes
Some solutions
Automatic Accrual Agreements
There is an agreement that the business interests are bequeathed to the surviving business
owners only. A life insurance policy is established to compensate the beneficiaries of the
deceased accordingly. (Page 5)
Cross-option Agreements
This type of agreement ensures that the surviving shareholders have the option to buy the
deceased’s share of the business. The widow(er) has the option to sell. (Page 6)
Buy/Sell Agreement
Using a Buy/Sell agreement, the business owners all agree that on the death of a business
owner, the deceased's estate beneficiaries will sell the business interests to the remaining
business owner(s). (Page 7)
Double Option Agreement
The surviving shareholders can either purchase the deceased’s shares, or liquidate the
company and pay a share of the total proceeds to the widow(er). (Page 8)
In a company with four partners or
directors with an average age of 35,
there is nearly a 50% chance that one
will die before the age of 65.

3. 2
Shareholder Protection
Executive cover for private limited companies
A private limited company is owned by shareholders and run by directors. These
shareholders and directors could be the same people, especially in the case of family and
small businesses.
On the death of a shareholder the standard Articles of Association will follow the rules of
Singapore Companies Act (Cap 50), specifically Table A of the Act. This states that the shares
of the company form part of the deceased’s estate.
The other shareholders will ideally want to keep control of the deceased shareholders
shares. But the widow can technically sell them to anyone, even a competitor. If the shares
are fully paid-up, then the new holding must be accepted by the surviving shareholder(s).
If the purchaser is a minority shareholder, there are measures within the Act (specifically
Section 216) that ensure they are not mistreated by the other shareholder(s). Compensation
or restitution can be sought through the courts. The situation can become very complex and
stressful for all parties.
To avoid other people getting hold of the shares and being in control of part of the
company, and ensure that the widow is properly compensated, a Shareholder Agreement
and Shareholder Protection plan is essential.
A Shareholder Protection plan is essentially an agreement detailing how the shareholding
should be treated on death or serious illness of a shareholder, coupled with a life assurance
contract to facilitate the purchase of the shares by the remaining shareholder(s). There
should also be an agreed basis for valuing that share in the case of a dispute.
It is necessary for each shareholder to take out cover on their own lives, for the benefit of
the remaining shareholder(s).
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Has your business got the succession arrangements in place that would avoid such a scenario?

4. 3
Executive Cover for Partnerships
A partnership is made up of two or more people who work together in business. Because
each partner owns a share of the partnership, they are entitled to a share of any profits. It is
also usual that these partners will be self-employed. If there is no formal agreement, on the
death of a partner, the partnership will automatically be dissolved.
i
If one partner died without a current partnership agreement, the Partnership Act (Cap 391)
states that all holdings were equal.
Additionally, the surviving partner may want to take over the deceased partner's share so
that they can continue to run the business without the complications of dealing with new
parties.
Further the deceased partner’s share of the business becomes a debt owed to their estate if
it cannot be paid-out immediately. This debt must be settled before any profits are shared
among the surviving partners. So they are forced to create more revenue with fewer people.
In short, a Partnership Protection plan must be in place.
Partnership Protection is essentially an agreement detailing the respective ownership
proportions of the partners, and how these would transfer on the death or serious illness of
one of them. This would be coupled to a life assurance policy that will pay out to the
remaining partner(s). This will enable them to purchase the deceased partner's share from
the estate. The policy is taken out for the value of the share and is put in trust for the other
partner(s).
This is beneficial for the partnership and the family of the deceased - the partnership retains
the deceased partner's share and the family is paid for them.
There should also be an agreed basis for valuing that share in the case of a dispute.
Even if ownership is split between the partners in differing amounts (for example
60%/20%/10%/10%), on death of a partner, the law sees them all as EQUAL!

5. 4
Critical Illness Risks
Source: The National Institute of Critical Illnesses
Critical illnesses such as a heart attack or the development of cancer can have an enormous
impact on the company, the person affected, and their family.
Should a shareholder or partner suffer from a critical illness, they may not be able or willing
to work at all or at the same level.
 How would the company deal with a director who could no longer perform?
 How might the director provide for himself and his family in such a situation?
 Would the company expect the director to sell their shares?
 Would the director expect them to purchase the shares at a certain value?
The answers to these questions are of crucial importance.
It could be a disastrous error indeed for both parties just assumes that the other would act
as they expect. Drafting a written agreement while all is well is essential.
The average age for developing a critical illness? Forty three years old.
Study by Dr Freddie Bray, The Lancet Oncology, May 2012.
The average age for developing a critical illness? Forty three years old.
A 25 year old non-smoking male has a 24% chance of developing a critical illness
before he is 65. If he were a smoker the chance rises to 49%.
Worldwide cases of cancer are likely to rise by nearly 75 per cent by
2030. In 2008 there were 12.7 million new cases of cancer, which would
rise to 22.2 million by 2030.

6. 5
Third Party funding
Investing in the small to medium size enterprises (SMEs) can be a considerable risk as often
the SME has few physical assets to match the investment.
Essentially the investor is investing in a person, their idea and ability.
In other words, intangible assets of the firm.
The investor must therefore have great faith in the business model and the capabilities of
the key people within the firm. Should one of these key people pass away or become
seriously ill, the value of the firm (and therefore the value of the investment) falls
considerably and may be wiped out completely.
 If the key entrepreneur passes away, could an investor realise their investment?
 If a key person suffers a serious illness and the company’s value falls, could the
investor be compensated, or would they simply have to accept the loss?
Business protection provision, in the form of a written agreement and corresponding life
assurance contracts, can therefore provide considerable comfort and reassurance to such
investors.
Therefore such a plan offers an additional reason for the investor to choose the venture
over its competitors.
Business Protection can help! Taking steps to formulate a business
protection strategy should greatly enhance the appeal of an SME to
third-party investors.

7. 6
Automatic Accrual Agreement
There is an agreement that the business interests are bequeathed to the surviving business
owners only.
A life insurance policy is established for family or the estate, equivalent to the value of the
interest in the business. This is used to compensate the beneficiaries for loss of the business
interests on death. What happens?
 An automatic accrual agreement is drafted, stating that the business assets of the
deceased should transfer to surviving business owners
 Each business owner sets up a life insurance policy, possibly in trust, for their family
or beneficiaries
 On death, the life insurance proceeds are paid to the beneficiaries and the business
assets transfer to the surviving business owners
In the event of death, the business owner's share automatically goes to the surviving
business owners without going to the estate. For Inheritance Tax purposes the estate is
treated as receiving the cash, unless the policies are in trust, and not the share of the
business. This may mean that Inheritance Tax may be payable.
This is an absolute agreement; the beneficiaries of the estate cannot prevent the surviving
business owners receiving the interest in the business or reject the life insurance
proceeds.
In this example the widow never holds the shares and must accept the life assurance
proceeds in lieu of shares. The shares automatically pass to the surviving shareholders.
Shareholder A dies
Surviving shareholdersWidow
ShareholdingLife Assurance Policy
SharesCash

8. 7
Cross-option agreement
This type of agreement ensures that the surviving shareholders have the option to buy the
deceased’s share of the business.
The beneficiaries also have the option to sell the shares to the surviving shareholders.
 If either party exercises their option, the other party is bound to comply.
The value of the company is based on the audited accounts so the Life Company can accept
the Sum Assured calculation.
In this example the widow holds the shares and has the option to sell the shares to the
remaining shareholders. The surviving shareholders have the option to demand the share
from the widow. Should either option be exercised, the other party must comply.
On demand but NOT
automatically
Shareholder A dies
Surviving shareholdersWidow
Life Assurance PolicyShareholding
CashShares
Shares
Cash

9. 8
Buy and Sell Agreement
Buys and Sell Agreements use a life insurance policy with a special agreement for the
business owners to buy the business interests from the family.
What happens?
 Each business owner sets up a life insurance policy in trust for the other business
owners
 A cross-option agreement is also set up at the same time
 On death, the life insurance proceeds are paid to and used by the remaining business
owners to buy the interest in the business from the deceased's estate.
Using a Buy/Sell Agreement, the business owners all agree that on the death of a business
owner, the deceased's estate beneficiaries will sell the business interests to the remaining
business owner(s).
This is an absolute agreement; the beneficiaries of the estate cannot reject the surviving
business owners buying the business interest.
This is similar to automatic accrual except here the widow holds the shares. On death the
shares must be sold to surviving shareholders at their current value. This may be considered
a safer option for the widow than the accrual method, where she assumes that the life
cover sum assured still reflects an accurate valuation.
UK nationals should also read the additional notes in the reference section at the end.
Automatic transfer
Shareholder A dies
Surviving shareholdersWidow
Life Assurance PolicyShareholding
CashShares
Shares
Cash

10. 9
Double Option Agreement
Using a life insurance policy with a special agreement for the business owners to buy the
business interests from the family or decide to cease trading and liquidate the assets.
What happens?
 Each business owner sets up a Life insurance policy in trust for the other business
owners
 A double option agreement is also set up at the same time
 On death either:
- The surviving partner(s) purchase the shares from the deceased’s estate, using
the life policy proceeds.
- Alternatively the surviving partner(s) liquidate the company and pay the estate
their share of the proceeds plus their share of the life assurance policy.
The Agreement that allows the business interest to change hands:
This type of business owner agreement allows the remaining business owners to buy the
deceased's share of the business from the estate as an option and business property relief
for inheritance tax is still retained.
This is an option agreement; there is a specified time during which the remaining partners
can buy the share, and during this time the estate has a duty not to sell it to anyone else.
The beneficiaries of the estate can reject the surviving business owners approach to buy if
they do not act within a specified timescale.
Option A
Option B (liquidation)
Shareholder A dies
Surviving shareholdersWidow
Life Assurance PolicyShareholding
CashShares
Shares
Cash
Liquidation

11. 10
Keyman Cover
Of course it may well be the case that a business has a crucial employee – someone that is
directly responsible for a vital part of the business and considerable income generation.
Without this person, the business may cease to function as well (or even at all) and profits
would be greatly impaired.
It would be prudent to ensure that steps are taken to protect the business from the loss
(permanent or temporary) of this person.
“The premiums incurred on ‘Keyman’ insurance will be tax deductible if this insurance is an
insurance against loss of profits to the company in the event of the death or physical
disability of key personnel, subject to the condition that the capital sum insured does not
exceed the annual profits of the company that are attributable to the relevant key
personnel” Deloitte (Singapore) Corporate Tax note 2010
Key person Coverage is typically calculated as follows:
Key person’s total remuneration Expected total
__________________________ X gross profits X recovery period (years)
Total salary bill for the firm
Should the key person’s remuneration be quite low in comparison to their contribution to profits,
larger coverage can be negotiated.
Bear in mind that a shareholder can also be a key person.
It may be necessary to have two policies:
- one to cover the cost of share purchase
- one to cover lost profits caused by their death or disablement.
Life assurance premiums for key employee policies
can be 100% tax-deductible in Singapore.

12. 11
Insurance options
Traditional Life cover
Very simple and cost-effective coverage.
Underwritten at the time of inception, so premiums are guaranteed.
Coverage lasts for the term agreed at inception, provided that all premiums are paid.
Guaranteed pay-out on death, but the policy has no cash-value.
Critical Illness cover
Similar to traditional life cover. Pays out on diagnosis of one of the conditions covered1
.
Typically 30 conditions are covered. These range from cancer to stroke to blindness or
disability. A single lump sum payment which is tax free is made to the business (being the
policy owner) which can be used to purchase the Insured’s shares.
Return of Premium cover
An interesting variation on typical life assurance coverage.
The policy accrues a guaranteed value that increases each year from the 4th anniversary
onwards. This is clearly stated at the outset and so is not dependent on assumed growth
rates and so on. On the 30th anniversary the value equals the total premiums paid. So on
maturity, the holder receives all their money back and all that they have suffered is inflation.
Very clear, simple and straight forward.
Universal Life
A whole of life insurance policy2
designed for succession planning.
The policy requires a substantial initial payment (or series of payments over the initial
years). However as there is an immediate cash value to the policy (which grows in line with
a variable interest rate3
), it therefore may be included as an asset on the company balance
sheet. The firm enjoys multi-million dollar life coverage from day one.
On death (whenever that may occur) the policy pays its full amount of coverage to the
holder’s estate.
The name of the life assured may be changed during the term, meaning that different
directors/owners of the firm may be insured by the same policy.
The company may own the policy but also may assign it to the director on their departure
from the firm (as part of a retirement or “parachute” payment).
1
Provided the insured survives typically 90 days.
2
There is no set end date to the policy
3
There is a minimum guaranteed rate which will never be breached. This is typically 2%

13. 12
References
Chance that one Partner/Director will die before age of 65
NUMBER OF PARTNERS/DIRECTORS
2 3 4 5 10
AVERAGE
AGE
35 28% 39% 49% 56% 81%
40 28% 39% 48% 56% 80%
45 27% 37% 46% 54% 79%
50 25% 35% 43% 51% 76%
Source: Assured Lives mortality Table AM80
Buy/Sell Agreement tax consideration for UK Domiciled persons:
There could be a potential inheritance tax problem for the deceased person's estate. This is because
the estate is deemed to have received cash, rather than a share of a business. This then means that
Business Property Relief, where there is no inheritance tax payable on death for the transfer of
business assets, would not be available if the assets were subsequently transferred from the estate
to the other business owners.
Disclaimer:
The legal measures and scenarios in this document are correct according to our understanding.
Meyado is not authorised to advise on legal matters.
Meyado does provide professional advice and execution on insurance matters.
Therefore separate legal opinion and advice must be sought from authorised legal professionals
prior to enacting any change of policy or documentation.
We would be happy to refer you to the excellent legal services firm with whom we work closely in
this area, should you so require.
Neither this document nor any information contained herein shall be construed as an offer,
invitation, advertisement, inducement, representation of any kind or form or any advice or
recommendation to buy or sell any financial products. Please contact us for a full financial needs
analysis.
Meyado Private Wealth Management Singapore Pte Ltd
150 Cecil Street, #15-02
Singapore 069543
Tel +65 6538 3583 Fax +65 6538 3234
Email: peterseligman@meyado.com.sg
www.meyado.com.sg