Article:

How to protect yourself and your business

19 August 2019

Michael Ryan, Wealth Adviser |

Did you know that there’s a 52%1 chance of you or your business partner dying or becoming unable to work again before the age of 65? This increases to 67% if there are three partners and 77% if there are four, and so on.

While this is a morbid statistic, it does shine a light on unexpected problems you may encounter and highlights why you need to protect your business in case of an emergency – unfortunately, it’s something most business owners haven’t even considered.

So what exactly are the risks when a tragic event occurs to a business owner? Let’s consider a few different scenarios.

Risk 1: Do you understand your debt commitments

To start with, debt is a big risk and can break a business, let alone a family’s finances. Should you or your business partner pass away, could your business continue to maintain its debt obligations? What if you or your partner had personally guaranteed loans? If you were unable to meet your obligations, the bank may go after personal assets to repay the debt.

Risk 2: Where do your business partner’s shares go and how do you pay for them?

If you run your business with a company structure and your business partner passes away, their shares are likely to pass to their family without a prior agreement in place. This may be undesirable as you might not want to be in business with them, nor is there anything forcing them from selling their shares to you. Even if you were able to purchase the shares, you may find obtaining a loan under these circumstances very challenging. Additionally, if you or your business partner were no longer in a position to work due to disability or illness, the other will need to be paid out – how do you fund the payment? How do you value the business? What mechanism is in place to trigger the purchase and sales of the shares?

Risk 3: What will happen to your family?

If you are a sole trader and something were to happen to you, what would your family do? Would you or your family be able to maintain their normal lifestyle? What if something didn’t happen to you, but to a key person in your business? Could your business survive and for how long?

This is where proper business succession planning and risk management is vital. Planning for the unforeseen might include short-term contingency plans, but they also need to cater for a more permanent change and potentially funding a buy out and/or loan repayments. Having a plan in place and reviewing it regularly can be extremely useful if one of these events occur.

So what can you do about it?

Depending on your circumstances, business structure and financial situation, there can be a few different options available to mitigate or eliminate the above risks. One cost effective solution to transfer the risk is taking out Life and Disability insurance cover, although it needs to be structured correctly to get the desired result. Whatever you choose to do, it is vital that proper advice is sought from your accountant, solicitor and financial planner to ensure the plan is suitable for you and your business.

If you would like to review your business succession plan, or even if you’ve never gotten around to talking to someone about these things before, please get in contact with a member of the Private Wealth team. We can work with your accountant and your solicitor to ensure your business succession plan encompasses proper risk protections.

1Zurich Mortality and Morbidity calculator, 2004.

Disclaimer:

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in Australia to discuss these matters in the context of your particular circumstances. BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.
BDO Private Wealth Advisers Pty Ltd ABN 62 805 149 677 AFS Licence No. 238280 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Private Wealth Advisers Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. 
BDO is the brand name for the BDO network and for each of the BDO member firms.
© 2019 BDO Private Wealth Advisers Pty Ltd. All rights reserved.