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: Understanding 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? In the scenario where your business partner passes away, the bank may call in the loan, which could be devastating. If you were unable to meet your debt obligations, the bank might also be able to 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 for both you and the deceased's family. You might not want to be in business with them, nor is there anything stopping the family from selling their share to a third party or placing unrealistic demands on the valuation of those shares. Even if you were able to purchase the shares from the family, you might find obtaining a bank 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: Loss of key employees
What if something didn’t happen to you, but to a key person in your business? How much income would you lose without them? For how long could your business continue to operate without them or a replacement?
Risk 4: What will happen to your family?
Not only should you consider the risks to your business, but also to your family. If something were to happen to you, what would your family do? For how long would you or your family be able to maintain their normal lifestyle and meet your personal debt commitments?
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 buyout 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, proper advice must be 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.
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