Financial planning for business owners can be a complicated affair, and with so many balls to juggle in the day-to-day running of a venture, it is easy to neglect this crucial aspect of ensuring future success.
Insurance is one of the aspects most often overlooked – internal research conducted by Sanlam has shown that two thirds of South African business owners do not have basic business insurance.
Sanlam Business Market's head of distribution support, Deon Theunis, says the owners of small and medium-sized enterprises (SMEs) need to ensure they are adequately prepared for unexpected events that could otherwise have severe financial consequences for themselves, their business and their families – before it’s too late.
"Of the one third of business owners that do have insurance, only 10 percent review it on an annual basis. Most owners have an attitude of 'it will never happen to me', but they do not realise the risk they are taking. By neglecting this aspect of their financial planning, they are essentially not insuring the most important thing – their ability to generate an income."
Theunis says the three key risks most businesses need to be insured for are:
1. Signing surety without surety
External funding is a normal part of business, and may come in the form of an overdraft facility, a term loan or asset finance. Financial institutions normally require the owner of a business to sign surety for the funding required. Theunis says very few business owners realise, however, that their personal estates are also affected by this.
"If the owner who signed surety dies, his or her estate may be called upon to settle the debt. This can put enormous financial pressure on not only the business, but also the owner’s family."
Business owners need to ensure their personal estates are protected through what is called contingent liability insurance, which pays off debt if the business owner dies.
"Our statistics show that only 3 percent of the business insurance policies we sell are for contingent liability, despite the fact that almost all businesses have debt."
2. Unrecovered capital
When starting a business venture, many entrepreneurs bring capital into the business, often in the form of a loan to the business. This capital belongs to the business owner's personal estate, and the family is thus entitled to receive the money back in the event of the owner's death. However, the business may not be able to repay (or refinance) the loan, leaving it in financial distress. Theunis says the problem can be solved by covering the loan with a life insurance policy, which will pay out upon the death of the business owner.
3. Unrealised wealth
When a co-owner in a business dies or becomes permanently disabled, the deceased owner's estate can be left severely exposed, but the remaining owners could also be at risk. It is important to know what will happen to the business partner's share of the business if this partner dies or becomes disabled. For example, if the partner's share is inherited by his or her family, the latter could either expect to sell their shares to the surviving business owner, or expect to get involved in the business – to the possible detriment of the business.
"A buy-and-sell agreement states what will happen to each partner's share of the business in the case of death or disability. A life insurance policy is then used as the funding solution to implement the agreement, for example, buying the share of the deceased or disabled partner."
Theunis says there is a multitude of other financial planning needs business owners should also consider, including insuring against the loss of a key person in the business, succession planning in the case of a family business, cover for employees such as funeral insurance, financing possible expansion of the business, and reinvesting surplus cash.
"Because it is such a complex field and each business has unique financial needs, it is crucial to get expert advice from a qualified financial adviser before making any decisions. A financial adviser can assist business owners to prioritise their business insurance needs to protect not only the business, but also themselves and their families," he concludes.