Written by: Jamie Burgmann, Partner at Select Investors
What makes a business successful often lies in the knowledge, experience and skill sets of the key people in the company. They steer the business in the right direction, make the tough decisions and ultimately drive the profitability of the company. Taking a degree of risk is an inevitable part of creating a successful business. However, there are some risks which can be planned for to reduce or eliminate entirely. This includes the risk of you or another key person in your business suffering an untimely death or being struck down with an illness or disability.
For example, is there someone in your business who has extensive technical knowledge, significant contacts or brings in most of the sales? What impact would their departure have on your business? If you play a critical role in the company as a major shareholder or a key decision maker, the consequences could be far more distressing than expected. The implications of such an unforeseen demise raise several questions for the business to consider:
- How much would it cost to replace the required expertise, experience, and technical know-how of the individual? Will the loss of an important person shake the confidence of shareholders or other key stakeholders in the company?
- Are there any existing business loans or credit facilities which are due to be paid? If yes, how would this payment affect the company’s overall profitability?
- Will the loss of this key person cause any business disruption or loss of important business network and erode potential profits?
- If the key person is also a shareholder what will happen to their shareholding in the event of an untimely death? This could lead to family members becoming involved in a business in which they have little or no expertise or experience. This could impact profitability and damage the long-term value of the business.
To help alleviate and minimise impacts to your business, you could look at insurance to assist with cashflow to help either pay out the respective owners’ equity in the business or have capital available to find a replacement and any loss of revenue whilst you are searching for the right replacement.
Protection You Will Need As A Business Owner: A Case Study
- Sophie entered a partnership with her friend, Lucy, 5 years ago to co-own a diamond import business
- Lucy and Sophie have equal shareholding in the partnership
- The company has around 20 employees
- Both began discussions to expand the business and venture into a bricks-and-mortar shop selling customised jewelleries, such as rings and necklaces
- Unfortunately, Lucy passed away in a road accident on her way to work
WITHOUT A BUY-SELL AGREEMENT
- Lucy’s partnership rights were transferred to her husband, Harry, who does not have experience nor expertise of the diamond industry or in business management.
- Sophie is unable to take full ownership of the business as she does not have the funds to buy Lucy’s shares. Harry then sold his shares to Richard, an outsider who has plenty of skills and is experienced in the industry.
- Richard has a different management style and vision, leading to conflicts and disrupting the original expansion plan Lucy and Sophie had painstakingly planned.
WITH A BUY-SELL AGREEMENT
- If a shareholder or partner dies, their business interests will usually pass to their state. However, with a shareholder agreement in place, it can restrict the transfer of shares to Harry, as it provides a pre-agreed procedure for the business to follow, after a specific event has happened.
- With the lump sum pay-out from an insurance policy, Sophie can ensure she has the available funds to buy out Lucy’s shares and ensure the original business expansion proceeds as planned without external interruption.
As demonstrated in the case study, having business protection in place can make a huge difference to you, your business and your family’s financial future.
If you would like to discuss your business and protecting your key assets within your business, please contact Jamie on firstname.lastname@example.org or +65 91679634 to arrange a consultation.
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