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Building a successful business requires much planning, often a lifetime of hard work, investment that may include your personal financial resources, and does not come without risk. And yet there is one area of proactive risk management that many business owners, partners or shareholders often overlook, or are even unaware of.
These “hidden risks” are usually triggered by future events such as death, disability or critical illness, of a co-owner or partner.
Quite often these serious risks to a business – and sometimes to the personal estates of the individual owners involved – are overlooked as the owners of a business or directors and C-suite executives with a vital stake in the business are simply just unaware of these risks.
When these risks do arise and no provision has been made for them, they can have catastrophic consequences for the continued operation of the business, its financial situation, its remaining owners and its employees.
How these risks can derail your business
There are any number of potential events that could derail your business. Questions one should ask yourself are, what happens if –
- A partner or co-owner dies, and their share is tied up in their estate which takes time to wind up, keeping the business and remaining owners in uncertainty?
- A co-owner whose expertise is key to the ongoing success of the business dies or is unable to work due to disability or critical illness and needs to be replaced.
- You have personally guaranteed repayment of a loan or debt of your business and you passed away before it has been repaid – what will be the impact not only on the business, but also on your estate and your loved ones?
The benefits of foresight and Business Assurance
There are many different scenarios that could play out with highly negative consequences for a business and its owners, senior management and employees. Fortunately, there are a number of very good Business Assurance options available to safeguard your business and the owners against the risks associated with such events.
Business Assurance encompasses three vital elements: Contingent Liability or Loan Cover, Key Person Cover, and Buy-and-Sell Agreement. It is essential for any business with more than one owner or shareholder to carefully consider these issues and to prudently manage such risks in advance.
Key Person Cover
Quite often the success of a business is dependent on one or more key persons whose expertise is vital to its operation. The loss of such a key person can be devastating. It may take time and incur costs to find a suitable replacement. The business may have to pay out sick leave benefits to the affected partner. And profits may be lost while the business is disrupted.
To protect the business and remaining owners against financial loss and disruption of this nature when it occurs, Key Person Cover is life insurance purchased on the life of such a key person.
Contingent Liability and Loan Cover
Businesses quite often incur liabilities such as loans or credit vital to the operation of the business. In such cases creditors or lenders often require that the owners of the business provide personal surety or guarantees for the repayment of the debt. The loss of one or more owners due to death or disability could adversely affect the ability to repay such a debt with serious consequences.
Contingent Liability and Loan Cover therefore provides a lump sum on the death or disability of the insured partner that will enable the business to repay the full debt or part of it, depending on how much cover was taken out. In this way the business can settle its debt and the estate of the assured partner is not affected.
The Buy-and-Sell agreement predetermines to whom the ownership share may be sold and usually at a price calculated in terms of the agreement. As part of the agreement Life Assurance is purchased to provide the funds required by the remaining owner/s to buy out the share of the departing or deceased partner.
As the entire arrangement is predetermined and funded, with clearly stipulated procedures and parameters, it avoids conflict and disruption, allowing for the smooth transfer of the ownership stake and continued operation of the business.
In all of these instances, depending on the type of assurance product involved and compliance with its provisions, and/or compliance with the relevant tax provisions, certain tax benefits may apply either for the business, or for the estates of the owners involved. Because of the range of available Business Assurance options, their different benefits and provisions, and their possible tax implications, it is always best to talk to a qualified financial adviser about these.
If you wish to fully assess the hidden risks to you and your business, and learn more about Business Assurance and the various available products, you can contact Carrick Wealth at [email protected].
- Carrick Wealth is a registered South African financial services provider specialising in South African and international financial planning and integrated wealth management solutions. Carrick is also licensed in Zimbabwe, Botswana and Malawi, and holds three global licences in Mauritius. Carrick at all times maintains its independence with regard to product providers and asset managers, providing bespoke risk assessment, financial planning and other services to high net worth individuals (HNWI). Through our own qualified and experienced wealth specialists, as well as through partnerships with industry leaders in the fields of foreign exchange, tax, international property, offshore bank accounts, trusts, wills and estate planning, Carrick is able to provide the highest levels of service for your financial planning and investment requirements, both offshore and domestic. This communication is intended solely for information purposes for the use of designated recipients and is not an offer, recommendation or solicitation to transact. While it is based on information available to the public and from sources believed to be reliable, Carrick makes no representation that it is accurate or complete or that any returns indicated will be achieved.