Article written by Jannie Rossouw, Head: Sanlam Business Market
www.businessdirectory.co.za defines a crisis as: “A critical event or point of decision that, if not handled in an appropriate manner (or if not handled at all) may turn into a disaster or catastrophe.”
Financial challenges in a business may come in many guises. For instance:
- A big contract is suddenly cancelled.
- A debtors’ book is not being managed well and bad debt skyrockets.
- A piece of equipment that is crucial to your production process breaks.
- A natural disaster damages or destroys your business premises.
- A business partner dies or becomes disabled.
This article will focus on the impact of your death, or the death of a business partner (if applicable), on your business and your personal estate.
There are 3 key financial planning risks that every business person should address:
- Taking out life insurance to cover business debt that you signed surety for in your personal capacity
- Making sure that the business is able to pay out your debit loan account (that is, your capital and time invested in the business) in the event of your death/disability.
- Protecting your shareholding in the business in the event of the death/disability of one or more shareholders, by means of a buy-and-sell agreement and accompanying life insurance.
If these 3 elements are not properly addressed, the impact will be as follows:
Allegiance Risk Type Classification
| Risk | Subject of the risk | Risk relevant to the applicable owner/person | Remaining owners | Business | Solution |
| ARTCTM 1 Exposure to 3rd Party Creditors | Suretyship that the owner signed for the business. | The creditor may call up the suretyship, exposing the estate of the owner. | If surety is called up against the estate of the deceased, it will result in a claim against the business, ultimately affecting the funding structure of the business. | Long-term and short-term funding structure may be exposed. Third-party creditors may withdraw finance or may increase cost of finance. | This risk can be addressed with a contingent liability solution. |
| ARTCTM 2 Unrecovered Capital | The capital, time and expertise spent on the business are the subject of the risk. | The loan account may never be recovered. | The risk of having to raise a large amount of capital to repay the loan account. | Capital structure of the business is exposed. Risk of not being able to replace the capital. Business may be sued for the loan account. | The risk can be addressed with a loan account solution. |
| ARTCTM 3 Unrealised Capital (Wealth) | The equity in the business is the subject of the risk. | The risk that the equity in the business may never be sold. | Risk of having to seek funding to purchase shares or face “foreign” partners. | Risk of foreign partners that may adversely affect the future management of the business. | This risk can be addressed with a buy and sell solution. |
My advice: Obtain the advice of an accredited financial adviser if you are unsure of whether these financial planning risks have been properly addressed in your business.
You work hard to make a success of your business. Make it a priority to protect this asset and your work.
To support business owners with the important task of business planning, Sanlam gives you free access to the book Your Annual Business Game Plan for Success, which provides an easy and straightforward framework needed to draft a well-crafted game plan that will create the positive change and growth necessary for business success. Go to www.sanlam.co.za/gameplan to download your free copy.
Sanlam is a proud partner of the National Small Business Chamber (NSBC).