Small to medium-sized businesses in more danger than they think

“Owners of small to medium-sized businesses often take on business risks in their personal capacity, exposing both the business and themselves to loss when an owner, partner, key shareholder or member dies, leaves or becomes disabled.

This threatens the continuity of the business for co-owners and the liquidity or financial soundness of their own estates,” says Somerset Morkel, Wealth Management Consultant, Alexander Forbes Financial Services.

Business and personal risks include the following:

· The estate of a deceased partner struggles to find a purchaser for shares and is forced to unload them at a fraction of the value

· Family members of the deceased, without the necessary skills, join the business causing strained relations and conflicts of interest

· Shares are sold to an outsider as the other partners cannot afford to buy them from a deceased partner’s estate resulting in the surviving shareholders losing control of the business

· Unsecured debt causes creditors of the business to lodge claims against the deceased shareholder’s estate, thereby threatening the welfare of the deceased’s heirs

· Being unable to afford to replace rare skills integral to the business, threatening the survival of the business when key individuals become temporarily or permanently disabled

“Indentifying, analysing and matching the correct combination of risk products to the needs of the particular SMME is the job of a business assurance professional” says Morkel.

For example, buy-and-sell arrangements provide remaining business partners with ready cash to buy out the deceased partner’s interest in the business while unlocking the value of the deceased’s share for the deceased’s family. A buy-and-sell arrangement, no matter how complex, consists of an agreement to buy and sell at a pre-arranged price in the event of one of the owner’s death or disability, with the purchase price being funded by policies.

“The agreement is merely an extension of the shareholders agreement and creates an obligation on both parties” explains Morkel.

Should one of the owners of the business die having signed suretyships for certain debts of the business, his estate could be called upon to settle those debts. There is always a possibility that the business might not have the liquidity to reimburse the estate, which could severely affect the family’s financial security and threaten the business. The simple solution of securing repayment of the debt with life cover solves the problem economically and provides certainty.

The replacement of rare skills integral to the operation of the business is also resolved financially by company-initiated life and disability cover on key individuals. The proceeds of the policy provides finance for the purchase of key skills back into the business should key employees die or become disabled. It will also cover any loss of profits that the sudden departure of these skills might occasion.

Companies can also establish funds that provide regular bonuses to key employees with rare skills as they attain certain employment milestones prior to them attaining pensionable age. Such strategies serve to lock rare skills into the business, while also providing funds for the location and appointment of replacement skills in the event of key people leaving.

“Helping business owners recognise, understand and safeguard these risks requires a comprehensive business assurance consultation process, full disclosure and the development of a tailored business assurance plan” explains Morkel.

Certainly, at minimum, most businesses should be covered for:

· business overheads when key individuals are temporarily disabled

· the replacement of assets, project finance or staff incentives

· retirement fund benefits for employees

· the provision of medical aid facilities for employees

That said, every business has its own unique combination of personal and business needs which intersect and overlap with the business in different ways.

As such, every business with a serious long term outlook should take professional advice from a financial planner “able to identify the overlap between the owners’ personal affairs and their stake in the business while approaching the risks that arise from a holistic financial planning perspective” concludes Morkel.