Can Your Business Survive Losing One of Its Key People

As much as you try to share skills, knowledge and information in your company, you probably have some people who are key to your business’ success.

key person insurance

It might be a Director or the CEO, whose vision made it a success in the first place. It might be your star salesperson, or someone in your IT area who knows the system backwards. It could even be someone who doesn’t create any revenue but does a fantastic job of boosting your company’s reputation or perhaps running your admin and back office systems.

 

Now, what would happen if you suddenly lost one of those key people?

 

And if you think it would never happen because they love your business so much, think again. Sure they may not resign. But they might decide to start a family and want to leave the workforce. Or what if they suffered a major illness or injury, or even passed away?

 

In addition to the obvious issue of lost productivity and their contribution to the business, you also have to spend time (and money) to recruit and train a replacement. And losing such a key person in your company could even affect your reputation and credit standing.

 

Could your business survive until you find someone who can fill their shoes?

 

Key Person Insurance can help you get back on your feet

 

Key Person Insurance can give you the financial support you need while you’re getting back on your feet. It can offset both your costs (e.g. hiring temporary help or recruiting and training a replacement) and your losses (e.g. not being able to do as much business until they finish their training).

 

It can also help with:

 

  • business succession planning
  • protecting your company’s equity value
  • agreed funding to purchase the equity
  • continuity of equity value for the surviving spouse
  • funding re-payments of any capital loans or personal guarantees
  • meeting requirements for bank business loans
  • salary packaging benefits (depending on the person’s taxation affairs).

And you can take out a policy (which is usually tax-deductible) on anyone you feel is a key person in your company.

 

How much should I insure them for?

 

The amount you specify will depend on the size of your company and the person you’re insuring.

The amount can be calculated in a few ways, including:

 

  • the ‘replacement cost method’, which is based on the cost is to replace the key person
  • the ‘contributions to earnings method’, which is based on the percentage of their earnings towards your company’s revenue
  • the ‘multiples of income method’, where their current salary is multiplied to determine their value.

 

 

Protecting your partners (and their partners) with a Buy/Sell agreement

 

What if the key person happens to be your partner in the company? Yes, the Key Person Insurance may well cover the finances involved in buying your partner’s shares from their family. But do you really want to be negotiating a deal at such an emotionally trying time?

 

Having a Buy/Sell Agreement in place can save everyone from a lot of anguish. It’s a legally binding agreement that determines what will happen to each stakeholder’s shares if they suffer a major illness or injury, or pass away.

 

It has two parts:

 

  • The Disposal Mechanism (also known as a Business Will), which states what happens if a partner leaves the business due to death or disability. It usually contains a valuation method.
  • The Funding Mechanism, which funds the Buy/Sell Agreement. This is where you would find the details of the Key Person Insurance policy taken out for each partner.

 

How do I arrange Key Person Insurance?

 

Before you take out Key Person Insurance you should first speak with your business advisor about the overall approach and then get into the details with an insurance broker. You need to make sure you get the cover you need without paying for the cover you don’t need. We can guide you in this area.

 

After all, it may well be the key to your business’ survival.

Understanding Risk Management for Small Business

Operating a successful small business involves decisions in several areas , one such area is risk. Risk, is the exposure to danger, harm, or loss. For businesses the term usually applies to the risk of financial loss.

Whether you have just starting your business, or you have been trading for a while, protecting the business you worked so hard to build is a priority. Unfortunately, it’s a step that many entrepreneurs neglect in the rush of launching a startup and operating day-to-day.

 

Here are several steps you can take now to protect your small business.

 

Choose the right form of business

Operating as a sole proprietorship — the default business structure for a one-person business — may be easy, but it’s not necessarily the best choice to protect your business. For one thing, the sole proprietorship structure doesn’t protect your personal assets. That means if a customer decides to sue you or a vendor demands payment that your business can’t afford, your savings, home and other assets could be fair game.

 

Hire a lawyer

You may not need to use a lawyer that often, but when you need one, you need one fast. Ask other entrepreneurs, business colleagues and friends for recommendations to lawyers who are familiar with small business issues. Take the time to compare lawyers by scheduling an interview with each before you hire them. Discuss payment options — most lawyers have different payment options for smallest businesses.

 

Find an accountant

Even if you plan on doing the bookkeeping yourself, a good accountant is worth the price. Who has time to keep up to date on tax law changes? You sure don’t — but accountants do. Not only can they save you money on your taxes, they can also provide valuable advice on how to structure your business, the best way to finance expansion, and how much to pay yourself.

 

For suppliers and contractors: Be smart about new customers

Before taking on a major new customer, conduct a credit check. This helps protect you against unpaid invoices. Never do business without a written contract — no matter how confident you are in the customer’s word. If something goes wrong, a contract may be the only thing that ensures you get paid for your hard work.

 

Buy business insurance

Most businesses need general liability insurance, and if you provide advice or professional services to customers, you may also need professional liability insurance, also known as E&O (errors and omissions) coverage. If you have employees you are required to have workers’ compensation insurance. Other insurance products to consider include key man insurance on your life and the life of other key employees, business interruption insurance (which protects your income if your business has to shut down due to a disaster), product liability, and cyber-insurance.

 

Protect your employees and customers

Disaster can strike any time, so it’s important to have a disaster plan for what you will do in case of emergency to protect your business. Create a plan and assign responsibilities for how to get employees and customers out of the building safely, what to do if a disaster keeps you and employees from getting to your business, and how you will keep running even if you can’t get to your physical location. Learn more about creating an emergency disaster plan.

 

Protect your business data

Back up your company data and documents with cloud storage so you can access files anywhere. When your information is stored in the cloud, you don’t have to worry about a crashed hard drive, or how a fire on your premises could wipe out precious data. To protect your business from cyber-crime and hackers, install appropriate firewalls and, more importantly, train your employees in cyber security measures, such as creating strong passwords.

Four things Small to Medium Business Owners Should Consider About Insurance

Australia’s more than two million small businesses make an enormous contribution to our communities and are the backbone of our economy.

Here are four steps that every small business owner should consider when thinking about their insurance. 

Key person insurance

Key Person Insurance Cover

 

1. Protect your most important assets

 

Your most important assets are your family, your employees and your ability to earn an income. Small business owners have a lot on their plate, juggling many roles within a company. With so much going on, it is understandable insurance won’t always be high on a long list of priorities.

However, ABS statistics show 5.3% of Australians experience at least one work-related injury or illness within a year. This is in addition to accidents taking place outside the workplace and non-work related illnesses. Any of these events could mean time out of the workforce and sudden loss of income, so it’s worth thinking about how your business would manage in this type of situation.

Additionally, offering life insurance to employees can act as a compelling tool for attracting and retaining top talent, and could be a highly competitive benefit!

 

2. Understanding different types of cover

 

It’s important to understand the different types of cover available for both you and your employees. For instance, income protection, trauma and TPD can protect your income by providing a regular lump sum if you become sick or injured.

Life insurance provides a lump sum benefit for your dependants should you pass away or become terminally ill. Key person insurance (also called key man insurance) covers against lost revenue and assets if you or a key person were to pass away, or became unable to work due to disability or illness.

Imagine if a business is owned by two business partners. One of those partners becomes sick and dies. What happens to the business? His/ her spouse will have a right to take over the share of the business. With Key person insurance, the surviving business partner can buy out the remaining share of the business and continue operations, allowing the business to still continue forward.

 

3. What’s important to you?

 

When considering your options think about what matters to you most and use that as a starting point. In our research business owners emphasised the importance of safeguarding their lifestyle, family and business.

 

4. Ask around

 

Seeking professional advice is always a good idea when reviewing your insurance. Our research shows small business owners consult a variety of sources for financial information. These include independent financial advisers, accountants or lawyers, brokers, internet forums, banks, friends and family. The research also showed that SMEs found using a broker saved time and gave them peace of mind.