Most Entrepreneurs are considered risk takers by having chosen a life of creating wealth on their own as opposed to creating wealth for someone else. It is therefore in the best interest of every entrepreneur to protect themselves and their business against all risks.
Business risk is not limited to just the going concern, but also the lives of all the business’s key personnel and even trade secrets.
Contrary to popular perception, many business risk products are affordable. However, the complexities of some of these products mean that you have to consult a professional to assist you.
Death, Disability and Illness Risks
The biggest asset of any business is the intellectual property held by the owners, partners, founders and even key staff in key positions.
When a small business loses a key individual, this can be disruptive and indeed in some instances lead to business failure.
Many business owners are unaware that there are policies that protect the business including:
- Business overheads policy: When a key person becomes incapacitated due to illness, disability or death. Overheads and bills need to be paid. In the case of a small business where often the founder is covering these expenses, the impact can be devastating. This type of policy covers these business related expenses often for up to 48 months including overdrafts, long term loan facilities and potential liabilities. This policy is of particular important in trades where there is high risk of physical injury or illness. Eg: Plumbers, Restaurant Owners, Doctors and Construction
- Business Contingency: Many entrepreneurs stand as surety for their business. In the event of death or disability, this policy will settle such sureties so as not to impact financially on the deceased estate, affecting the dependents or family of the deceased, or the disabled person in the case of disability.
- Deferred/Preferred Compensation: A deferred compensation plan is a type of policy plan, which is often used as a key staff retention tool. Should the key staff member fall ill, become disabled or die, an amount is paid to pre-determined beneficiaries of the key employee. The employee can also take out an endowment policy, which will immediately be ceded in security to the employer, who will pay the premiums on behalf of the employee. After the policy has matured and the employee has served a certain number of agreed years, the employee can cash the policy out.
- Key Man Assurance: Here, the business receives a lump sum pay-out on the death or disability of a key person that is nominated. Often this payment may allow your business to recruit a replacement or use it as an incentive to get similar skills into the business. Replacing a key person can run into millions of Rand. Even the founder of a business can take out a policy on his life so that the business can hire a competent replacement in order for the business to pay dividends to remaining dependents if business continuity is desired.
- Buy and Sell Policy: In a partnership or shareholding structure it can be a nightmare is the shares of your deceased partner or shareholder go into their deceased estate, and the wife or family decide they want to cash out of the business. If the remaining partners or shareholders do not have cash at hand to buy out the deceased estate, the business may need to liquidate assets, be sold to competitors or may become insolvent or cease altogether. These policies allow cash to be available to buy out a deceased partner’s interest in the business and the shares be re-allocated to remaining business owners as per contract determined when all partners were alive.
As simple as Business Assurance policies sound, the real complexity is around the various scenarios around taxation and the tax implications. It is highly recommended that any entrepreneur considering business assurance products engage a specialist Financial Planning Professional.
Business Risks beyond just assets
All entrepreneurs and business owners are well versed and easily accept risk policies to cover machinery, vehicles, buildings and inventory against theft or loss.
It is however equally important that the lives and the health of key persons in a business are protected. It is important that all entrepreneurs be well aware that death, illness or disability can lead to the fall of a thriving business.
Consult a Professional
To understand, and for expert advice on business assurance, please consult your financial planner.
If you do not have a competent financial planner already, you should consider interviewing prospective financial planners and conducting background checks with their references.
You will also need to confirm their accreditation with the relevant professional body.
To verify if a financial planner is a CFP® designation or to find a CFP® professional near you, visit www.fpi.co.za or call 086 1000 374 / 011 470 6000.