Taking calculated risks is an integral part of the entrepreneurial spirit that drives the small business community in Australia. Without risk there is no reward.
At the same time, however, there are some risks that are not worth taking and that can threaten the survival of a small business. Some things are simply not worth leaving to chance and you need to shelter the business from potentially disastrous impacts.
Here are 5 of the big ones that all small businesses should consider.
1. Protect the key factor that drives success
Think of the most valuable asset a business has and invariably it will be a person. This will usually relate to a specific attribute that key person possesses, such as a unique skill, expert knowledge, sales flair, innovative aptitude or even just a pure capacity for hard work. However, the value that this person has can be a double-edged sword, because without that person the business may quickly fail.
To protect against this risk, a smart business will take out insurance against a catastrophic event, such as premature death or a major illness or injury. This is commonly known as key person insurance. Insuring a key person will provide an instant capital resource to enable the business to take emergency actions, such as paying out debts, employing a specialised replacement or shoring up any drop in business income, while the business adjusts to the loss.
2. Protecting partnerships
Many businesses are successful because of the combined skill and resources of two or more partners who create the synergy that makes a business tick. If one of the partners suffers a major sickness or injury or sudden death, the other partners may want to continue the business, but they will need to deal with the missing partner’s share of the business, which will most likely pass into the hands of his or her spouse.
The ideal solution here is to have insurance protection in place to fund a buy-out of the exiting partner’s share, so that their spouse and dependents are looked after and the remaining partners can focus on keeping the business going. A solicitor can draw up a document known as a buy-sell agreement to cover the mechanics of how this transfer of equity will occur and a financial planner can be consulted to put the necessary death, disablement and critical illness insurances in place to fund this agreement.
3. Ensuring you have a succession plan
Eventually there will come a time when you will want to transition from being a business owner and into a leisurely retirement. Many business owners simply never get around to facing up to this reality, but this leaves them exposed to a major risk of the business value not being realised when the time comes to leave.
A business succession plan worked out with a qualified financial planner will seek to take care of this by dealing with such issues as:
- will the business ownership be passed on to family members and, if so, how will the owner be compensated?
- will the business be sold on the market and how can its value be maximised?
- what are the retirement funding goals for the business owner and what shortfall is there after the business sale is taken into account?
- how will such shortfalls be made up through superannuation and investment plans outside of the business?
There is also the risk that business succession will be forced on the owner well before retirement if health conditions arise, so a contingency plan for this must also be built into the succession plan, to avoid a fire sale situation.
4. Protecting those who matter most
Regardless of the business survival plans, business owners must also consider how they actually insure their own worth to their family – particularly if there are dependent children involved and a high level of living expenses being maintained. Business owners don’t have the luxury of an employer to pay their sick leave, so an income protection plan is essential to guard against temporary sickness and injury.
Lump sum cover should also be in place to give the family a capital resource in the event of premature death, total and permanent disablement and suffering a traumatic illness such as heart attack or cancer. A financial planner can make a personal risk assessment and recommend cover to protect the family against the financial impacts of these emergencies.
5. One other risk often overlooked
While income protection insurance will protect a business owner personally if sickness or injury occurs, there can be a blind spot back in the business that is left exposed. Regardless of whether the business continues to trade or not, there will be a range of fixed business expenses that will continue to be incurred, such as utilities, rent, leases and non-income producing staff.
Expenses such as these can be protected by business expense insurance. This type of cover is not very well known, but provides a vital link in the protection chain by coming into play in tandem with the person’s income protection to help pay for those fixed business expenses. Cover usually extends for a period of up to 12 months of absence and this can make all the difference in ensuring there is a business to come back to once the owner returns to work.
Talk to your financial planner if you want to take decisive action on protecting against all of these acute business risks.
What are your experiences with events that threaten a small business? Tell us below.