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Know the Personal Risks in Your Business

Many events can put a business out of business and it’s the responsibility of owners and managers to anticipate and plan for such events as far as possible.   You’ve probably insured your business for the most obvious risks – storms, fires and theft for example; but what happens if you lose one of the key people that keep your business going. Key person losses can be among the most damaging to any business, especially smaller organisations.

What do you think would happen to your business if an accident or illness made it impossible for you to work? What if one of your business partners or your best salesperson was injured in an accident and had to leave the business? It’s not pleasant to think about, but you do have to ensure that your business survives if a key person – yourself included, is disabled or dies.

Consider how your business would deal with that sort of situation if it was you:

  • Would the business be able to continue to generate an income while you’re incapacitated?
  • Who would take over your role in the business; how would they be paid?
  • Who would have power of attorney if you’re unable to make decisions?

These are difficult questions so they need to be thought through with great care. You need to prepare for eventualities now, while you’re still there to make decisions about the way you’d prefer things to happen. In a worst case scenario the death of a business owner can also mean the death of the business unless appropriate plans are in place to manage transition to new managers.

  • Do you have a will that stipulates who inherits your share of the business?
  • If a family member is to take over from you as head of the business, is this in your will?
  • If the business is to be sold after your death, who will administer the proceedings?

In the case of a partnership, in the absence of a binding arrangement the partnership is dissolved when one partner dies. All the surviving partner can do is to wind up the affairs of the partnership.

  • Is there an agreement between the partners for the surviving partner to purchase the deceased partner's interest at a prearranged valuation?
  • Is there life insurance in place that will provide funds for the surviving partner to purchase the interest of the partner that dies?

The situation can be even more complex if the business has several shareholders and one of them dies. Conflicts between the surviving shareholders can lead to failure of the enterprise unless suitable plans have been made to handle the situation.

  • Will other shareholders have first right of refusal to purchase the shareholding?
  • Is it acceptable for the deceased shareholder’s heirs to take over a role in the business?
  • Will the heirs be able to sell their inherited share of the business?

And what would happen if you were to suddenly lose a key team member - the sales manager or the office manager for example, because of illness, disability or death?

  • What impacts will that person's absence have on the business?
  • How will the missing person's business functions be performed?
  • What additional costs will be incurred to find a suitable replacement?
  • How long will it take before the replacement is sourced and becomes fully productive?

These are tough questions, but businesses have failed because they didn’t bother to address these issues before they happened.  Because there are legal, financial and organisational matters involved, you may want to form a risk management team of your legal adviser, your accountant and your insurance broker to guide you in creating a plan that will ensure your business survives these potentially disastrous events.