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No Business Too Small For Risk Management

Monday 15 December, 2008
Risk management will increase the probability of success - and reduce the probability of failure - of a business.

For any business owner, in addition to the usual insurance covering assets, there are two other types of insurance that they should consider. Business protection insurance helps business owners minimise risk to their business caused by the death or disability of the owner or a key employee.

Additionally, personal income protection means that a business owner's income will be replaced in the event of them being unable to work. However, it will not cover business overheads in the owner's absence.

Business owners should recognise that they face the risk of suffering some type of medical problem during their working life which will affect their ability to adequately manage their business for a period. Statistics make it almost inevitable.

For example:

  • One third of small business owners in Australia were aged 50+ in 2004
  • The chances of people between the ages of 30 and 65 suffering a major medical illness are one in seven
  • 28% of male small business operators work over 55 hours per week, increasing the risk of stress-related illness, such as cardiovascular disease, which affects one in five Australians and is the leading cause of death in Australia.

Business protection insurance can provide cover if the business owner dies or become disabled in a number of areas, including:

  • Loan cover - Provides the business with sufficient cash to repay or reduce debts, free up cash flow, and maintain the business's credit standing.
  • Key person revenue cover - Provides sufficient cash to compensate for the loss of revenue and replacement costs if a key employee dies or becomes disabled.
  • Business succession cover - Provides the outgoing owner or their nominee with enough cash for the transfer of equity to the continuing owners.
  • Business expenses cover - Provides for 100% of the fixed business expenses.

Business protection insurance can therefore be tailormade according to particular needs.

It removes an area of potential stress, providing peace of mind for business owners and their family members and employees in the event of death or disability.

Reviewing the level of cover to suit new circumstances as the business grows and changes will ensure the owner is adequately protected. Is your business financially prepared for the unexpected? 

Business protection insurance case study

Bill and Ben started a business together. The start-up capital and purchase of business assets was valued at $500,000. Bill developed the business products and services, and Ben managed the administration and client relationships.

Two years later, Ben died from cancer. By this time, the business value had increased to $1,500,000. Bill wanted control of the company, but Ben's wife Jenny wanted a fair value for Ben's share in the business, which she had inherited upon his death.

Bill couldn't afford to purchase Jenny's shares at the price she was asking, so Jenny attempted unsuccessfully to sell her shares to an outside party.

Jenny was then forced to work in the business to support her family, despite having no expertise in the industry. Bill resented this arrangement as he felt he was doing all the work, but sharing the profits with Jenny.

Had Bill and Ben taken out appropriate business succession cover, Bill could have paid Jenny for her shares and been free to run the business on his own.

Jenny would have had funds to live on, reflecting Ben's contribution to the business, and been free from any further involvement.

Insurance cover should take into account the increasing value of the business so, at the time of Ben's untimely death, the appropriate amount of insurance would have been $750,000 each for Bill and Ben, representing the potential purchase price for each of their 50% share of the business.

At the same time, cover could have been taken to protect the business in case one of the partners died, and life policies put in place to further help Jenny and the family.

Author Credits

Andrew Buchan is a partner with accountants and business and financial advisers HLB Mann Judd. For further information visit the HLB Mann Judd website: www.hlb.com.au.
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