Built to last – Protecting your business
Think of “the unthinkable” by considering the following scenarios…
If something happened to you:
- Would you be sure that you or your family would receive adequate payment for the transfer of your interest in the business to your business associates?
- Would the business have sufficient funds to repay any loans owed to you and release any assets held as security?
- Could your business associates continue to run the business?
If something happened to one of your business associates:
- Would you be sure that the transfer of that person’s interest in the business would be not only orderly and equitable, but could be funded?
- Would you lose a key revenue generator?
- Would you have enough cash flow to meet your business commitments?
- Would you be able to pay out business debts to release any loan guarantees or personal security that associate may have given?
- Would the business struggle with the loss of key skills and costs to replace those skills?
- Would you want to avoid selling or encumbering personal or business assets?
You have worked hard to build up your business so you will want to make sure it can withstand whatever life throws at it. Well structured Income Insurance helps keep your business functioning and protects the value of your business assets in the case of unplanned events. Without it your business may fail, exposing you, your family and business associates to unnecessary financial risk. The key to good Salary Protection is the right amount of cover for the right people at the right time.
- 69% of people in small business have no income protection insurance.
- Only 25% of people in small business could keep their business going or maintain their lifestyle for more than six months if they suffered serious illness or disablement.
- 47% of people in small business are not aware that income protection is tax deductible.
- 31% of small business owners are aged over 50, which makes succession planning important.
The solution is to implement a set of protective arrangements that provide funding on the death or disablement of a key person. This would enable you to repay business loans or shareholder/director loans, to offset loss of revenue, or provide funding to exercise a transfer of the injured or deceased person’s share of the business.
So, what protection does your business need?
There are three basic protection needs that typically apply to businesses:
- Asset protection for business borrowings and shareholder loans
- Revenue protection for key people
- Ownership protection for the principals
It’s the intellectual capital provided by key people in your business that generates profit. Material things can always be replaced or repaired but a key person’s death or disablement can result in a financial loss more disastrous than any loss of, or damage to, physical assets.
In such a situation, a business may be forced to sell assets to maintain cash flow – particularly if creditors press for payment or debtors hold back payment. Similarly, customers and suppliers may not feel confident in the trading capacity of the business, and its credit rating could fall if lenders are not prepared to extend credit. Outstanding loans owed by the business to the key person may also be called up for immediate repayment.
Asset protection can provide the business with enough cash to preserve its asset based so it can repay debts, free up cash flow and maintain its credit standing if a business owner or loan guarantor dies or becomes disabled. It can also release personal guarantees secured by the business owner’s assets (such as the family home).
A drop in revenue is often inevitable when a key person is no longer there. Losses may also result:
- From demands that can’t be met;
- Whilst you’re finding and training a suitable replacement;
- From errors of judgement that can happen due to a less experience replacement;
- Through the reduced morale of employees.
Revenue protection can provide your business with enough money to compensate for the loss of revenue and costs of replacing a key employee or business owner should they die or become disabled.
The death of a business owner can result in the demise of an otherwise successful business simply because of a lack of business succession planning. While business owners are alive they may negotiate a buy-out amongst themselves, for example on an owner’s retirement. But what if one of them dies?
The remaining owners must now negotiate with the deceased owner’s legal representative, who may be more concerned about the needs of the estate than the needs of the business. Many business owners mistakenly believe that this contingency has been catered for in the business’ constitutional documentation. But often there is no buy-out provision, or if there is, it’s usually ineffectually drawn up and inadequately funded.
Ownership protection can provide sufficient cash to facilitate the transfer of the outgoing owner’s equity to the continuing owners, should a business owner die, becom disabled, or suffer a critical illness that results in the outgoing owner leaving the business.
The right type of business protection that covers you, your family and your business associates is dependant on your current situation. A risk specialist adviser can help wth convenient ways to package and pay premiums, and review any of your existing insurance. We may also be able to liaise with your legal representative to ensure your insurances are adequately reflected in your legal documentation.