More and more South Africans are now running their own businesses, in the traditional sectors such as restaurants and hardware stores, as well as the fast-growing services and consulting fields. A successful business takes money and time, and often the whole family’s financial resources are tied to the health of the business. And the success of a business is driven by its most important asset – its people. Business Assurance is the specialised field that looks at the risks to your business if owners or key staff were to leave, become ill or disabled, or die. Business assurance policies mitigate these risks and ensure that adequate provision is made for your business to withstand these shocks. Business assurance brings certainty, adds financial liquidity and is vital to the succession planning process.
Understanding the cash-flow risks to your business in case of unexpected events is essential
The two most common areas looked at are buy-and-sell agreements which provide for the purchase of shareholding between business owners; and key person assurance which compensates the business for the loss of a valued employee. Another aspect to consider is contingency cover which ensures that your business will not be financially impacted if the person standing surety for business debts becomes disabled or dies and cannot pay the business debts. Lastly, business overheads cover will provide income to pay the monthly expenses of the business if you are unable to work due to illness or injury.
A buy-and-sell agreement is a contract between owners or key staff where the estate of the deceased shareholder sells its interest in the business to nominated purchasers at an agreed price. This may be called a “business will” since it sets out the process for business succession. Usually an insurance policy is taken out on the lives of the owners to fund the purchase price. This ensures that the business can continue as a going concern with its benefits and obligations to staff and customers, while the family of the deceased owner receives the full value of the deceased’s interest in the business as soon as the estate is wound up. When faced with questions like these, how well prepared are you? If you die or become disabled:
- Will your salary from the business be lost, and how would this affect your family?
- How can your family unlock the value of your shareholding in your business?
- Who will take over the business?
Key Person Insurance
A key person may be an owner or an employee who has skills, knowledge and relationships with customers and suppliers, and it would be a real loss to the business if he died or became disabled. The business can simply take out an insurance policy on the life of the key person for the amount that the business would need in the event of his death, either to recruit or train a replacement.
The success of a business is driven by its most important asset – its people
Some key questions to understanding the cover required may be:
- Which employees are key to your business and how reliant on them are you?
- If the key person was to die, what would be the financial implications, and what would be the impact on the cashflow of the business?
- How long would it take to replace that person?
Manage your business risks for peace of mind
Running a successful business is the best way to create family wealth over the long term However, having a good understanding of the cashflow risks in case of unexpected events is essential. Don’t leave it all to chance. Take the time to meet with a Business Assurance professional and guard against these risks as far as you can.