Small Business Owners; Have you reviewed your ‘what if’ scenarios
Ask any successful small business owner about the importance of planning, and I am sure that they will have a comprehensive answer for you. And I don’t mean just planning for the day to day management, year on year business forecast items such as expected revenues and expenses, budgeting and cash flow. Rather I am talking about the business contingencies and the “what if” scenarios that may occur.
I believe that small business operators owe it to themselves and their shareholders to review their “what if” scenarios. It is a sobering thought that many successful small businesses have been brought undone due to inadequate or indeed non-existent business plans.
At Principal Edge, we believe that business contingency planning is as critical as having your own personal Will. Preparing a ‘Business Will’ can effectively safeguard your small business against a number of known pitfalls.
By way of example, if your leading revenue producer died, suffered a disability or trauma, what would be the impact on your business, your cash flows, and your customer base? How long would it take to find an adequate replacement for this person and have them operating at full speed?
Appropriate business risk management is the solution. ‘Key person’ insurance is the term given to insurance contracts owned by the company (or other entity) designed to protect the business (not the individual) in the event of death, disability or trauma.
Importantly, if it is owned by the business in order to protect revenue:
- The premium is likely to be tax deductible and appear as an expense item on the profit and loss statement.
- Any claim would be subject to tax at the company rate.
Implementation requires appropriate company minutes and an assessment as to the impact a loss of a key person would have. In my experience, some business owners have chosen a multiple of gross revenue as their guide and then the estimated number of years to replace the key person to full running speed. So if your key person generates revenues of $500,000 per year and you believe that it would take 3 years to replace him or her, you would need insurance of just over $2.1m in order to net the company a payment of $1.5m.
In the event of a claim, the company has a chance to move on financially, seek a competent replacement and maintain the business as a going concern. Without cover, the business is invariably forced to reduce staff, and possibly even undertake a fire sale of assets. The point is that this stress can and should be removed through adequate and comprehensive business planning.
Lex Goldsmith | Senior Advisor | Principal Edge Financial Services
