Businesses are at risk
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We all like to believe that we will live out our lives in perfect health, however...
Males have a 2 in 5 chance of suffering a critical illness between age 30 and 64. There is a 37 per cent probability of a female becoming disabled for 6 months or more before age 65.
Amazing statistics... a 2 in 5 chance - and the biggest problem with this is that disability through illness is the biggest reason... and it sits outside the coverage of ACC!
I'm sure that if we only think as far as our family, friends or workmates that we all know somebody that has had a heart attack, stroke or suffered from cancer.
Businesses are dependent on people for their survival.
What would happen to your business if one of the directors or key people were to die or become disabled?
• Would there be a need to clear or reduce debt?
• Lenders/Banks may become "nervous" – they may call in their loans
• Personal guarantees could be called in
• There would more than likely be a loss of profitability
• Custom & goodwill could be lost
• Credit lines could be reviewed
• There would be a cost of finding or recruiting replacements
• There could be a forced sale of the business
• The business could end
• A spouse could end up as a partner
In NZ there are over 280,000 businesses employing over 1.4 million people (Statistics NZ 2001). We are a nation of small businesses!
The main reason that small businesses in New Zealand stop trading, believe it or not, is not because of a lack of sales or poor market conditions - nearly 70 per cent of businesses that stop trading, do so because of illness or injury.
Most businesses have key personnel with special skills or knowledge, without whom the business may struggle to operate effectively, or even survive at all. Could a business get by without them, or another key person? If illness or an accident were to leave you short of such a person, you would need to quickly find a replacement, or train an existing employee. This could be both expensive and inconvenient. It can affect profit, customer confidence and lender confidence. There is a cost to finding a replacement, training costs and there is the hidden cost of the business owners time and distraction. So it pays to be prepared.
You have a partnership... because your partner provides something your business needs such as money, skill or knowledge. You share the profits and you share the losses. The biggest loss you can suffer though is to lose your partner... your partnership will end right then!
You have two choices available to solve this problem. You can liquidate or re-organise – which will it be?
If you liquidate you must:
• Close the business
• Sell all assets for what you can get – and you know what you get on a forced sale
• Pay the bills – and pay them in cash
Divide the balance with your partner's heirs or executors
Look for a new job or business
OR – if you reorganise you must:
• Find a new partner
• Buy your partner's interest from his/her estate. How much will you pay for it? Where will you get the money?
• Sell your interest. Who will you sell it to? How much will you get for it?
Whether you buy or sell, there is always one question...
How much is the business worth?
Suppose you think it's worth $1,000,000 (and you should know)... but your partner's family think it's worth over $1,500,000.
A competitor makes you an offer of $1,200,000 (a very good offer), but your partner's brother in law or some other well meaning friend still insists it's worth well over $1,500,000.
Very often such differences of opinion are only settled in court!
Then you find yourself and your business tied up in an expensive law suit. What would your business be worth then?
There is something that can be done...
Suppose you and your partner decide today that the business is worth $1,200,000 and suppose you contract to buy your partner's half interest (or sell your half interest to your partner) for $600,000. Then if you or your partner should die or become disabled, your partner's estate would have to sell the business to you for $600,000 as agreed in the contract. Your partner's widow/widower would get cash for their interest and you would own the business. Everybody would be happy. No arguments, no lawsuits, no delays!
Just one big question left - where would you get the money?
A good business does not have $600,000 in cash lying around not working... that's where life insurance and share purchase agreements come into play. Insurance is by far the cheapest option to fund this protection plan - cheaper than borrowing the money or selling the assets. If you write up a legally binding agreement around this, then if the worst happens you will keep your business, the family of the exiting partner will get their pay out and most importantly the business should survive.
A recent survey found that...
Over 40 per cent of business founders or CEO's don't have life insurance
Over 77 per cent of business partners don't have life insurance
This is a big problem for the business sector!
