Attention Business Owners: Are you walking out or being carried out?
This heading is metaphorical of course but these are the only two ways you will exit your business.
‘Walking Out’ is the ideal scenario - it is your choice and involves the successful sale of your business for good money, hopefully leaving you with the tough decision of what boat to buy and what country to holiday in! Selling your business is not my speciality, but I recommend, and have seen benefits maximised by, utilising the advice and skill of a Business Broker (like Lester de Vere from ABC Business).
‘Being Carried Out’ is the unfortunate scenario where you have not chosen to leave your business but events have caused that outcome. Mitigating these risks is my specialty. Such events create serious financial vulnerability for business owners and potentially their family/estate. In a best case scenario, where you are only out of your business for 6-12 months, this can still have a devastating financial impact. In the worst case scenario, where you can never return to your business, this will result in a significant loss in value of what may be your biggest asset.
There are three main areas of risk that need to be discussed and mitigated as regards ‘Being Carried Out’. I will go into these in more depth in future articles but I have briefly summarised them for you today.
Key Person Cover, as it suggests, protects the business from the loss of a Key Person through death or disability. This could be a business owner or owners, as well as any key staff members who are crucial to the profitability of the business, meaning without them, (either temporarily or permanently) there would be a substantial loss of revenue/profit and ultimately business value. This type of cover provides funds for the quick recruitment of a replacement key person and covers the potential loss of revenue while this person ‘gets up to speed’.
Debt Protection Cover protects the guarantors of a business loan (usually the business owners) from the liability when through the loss of the business owner (due to death or disability) the business can no longer make repayments on a loan and ultimately is not able to repay the debt. This is very serious as most business owners will have signed personal guarantees which now put their family home at risk. It is important to also note that if there are two or more business owners, the loan agreements will likely be ‘Joint and Several’ meaning any of the guarantors can be required to repay the full amount by the borrower. You must consider fully repaying all businesses debt with the loss of any business owner, this is the only way to ensure there is no remaining liability to other shareholders and their families.
Shareholder Protection allows for the smooth transition of ownership in the event a Business Owner/Shareholder is exited from the business permanently. This is certainly more relevant for businesses with two or more owners and is simply a funding mechanism that provides the necessary cash to purchase the shares of another Shareholder in the event of their death or permanent disablement. This ultimately protects the future of the business as the remaining shareholder/shareholders gain full ownership of all shares meaning they are not left in business with the Family/Estate of the exited shareholder, along with the exited Shareholder and/or their Family/Estate receiving fair value for their shares.
This is a simplified overview of the types of business protection I specialise in. If you have not yet established the specific implications of ‘Being Carried Out’ to your business, or, if you have these types of cover but they have not been reviewed in the last 12-18 months, give me a call, I’m happy to help.