This is the story of Mr Tan, a deeply troubled business owner grappling with severe impact on his company. “I just learnt that my business partner, Mr Cheng, suddenly collapsed and passed away due to an acute heart attack. The business is highly dependent on him, as he is the person in charge of its day-to-day operation. As the news of his death circulated, many creditors started to press me for payments.
At the same time, debtors are also delaying their payments. There is no apparent successor to take over the operational part. To make matters worse, I also don’t have enough knowledge about the day-to-day running of the business to direct its operation – moreover, I do not have the time to do so. In fact, the banks have also withdrawn their facilities to the company.
The morale of my employees has been greatly affected. Although some have worked in the company for many years, there are talks of resignation before the situation worsens. For me, not only have I lost a good friend and trusted business partner, I am now facing the possibility of both financial and mental collapse.”
If you are a business owner determined to help your business thrive, you should have the answers to these three questions.
- What happens when a major shareholder or partner passes away or becomes permanently disabled?
- Can the business prosper and continue to flourish beyond my lifetime?
- How can I keep my key employees in the company till retirement
Often, many businesses fail to include an important factor in their assessment of risks – to insure the business against the untimely demise of key persons. Contingency plans can be drawn up through the use of Corporate Insurance. While it may not be possible to prevent the premature death and disability of key employees or owners, the provision of Corporate Insurance will limit the devastating damage that these unfortunate events can cause.
The advantages of Corporate Risk Management through insurance are plentiful and they depend on the types of insurance plan used. Generally, these advantages include:
- Paying off debts;
- Protecting the interest of the company;
- Avoiding forced liquidation or sale of shares to third parties
- Discharging guarantor liabilities;
- Buying more time;
- Attractive investment returns; and
- Offering retirement benefits to key employees.
The main areas that business owners should look into are:
Keyman Protection Planning
Keyman Insurance is CRUCIAL in companies that rely on one or a few key employees. These are the people whose contribution is vital in the company’s success. The Chief Executive Officer, Managing Director, Chief Accountant and employees with highly specialised skills or knowledge are some of the keymen commonly insured.
Keyman Insurance insures the company for loss of profits arising from the demise of these keymen. The importance of Keyman Insurance cannot be underestimated. For the business owners, it can help to:
- Avoid forced sales;
- Pay off debts;
- Buy time;
- Maintain the same level of profitability; and
- Ensure a smooth and orderly transition.
Credit Protection Planning
Most companies require bank loans and overdraft facilities from time to time. While these can tide over certain financial difficulties or help underwrite business opportunities, there is a potential danger in taking up hefty financial commitments.
In the unfortunate demise of the chief decision maker (e.g. Chief Executive Officer, Director), most banks will recall the loans. To worsen things, most of these decision makers are also guarantors for such loans, with the usual practice of pledging the guarantor’s property as collateral.
With Credit Protection Insurance in place, the liabilities of the company to the bank will be paid through the proceeds from insurance.
Business Succession Planning
In the event of the demise or permanent disability of one of the shareholders, partners or key employees, many businesses will face the dilemma of either having to liquidate the business or to take on a new partner. In both instances, there will be major disruption to the business.
With a proper Buy-Sell Agreement funded by insurance, the shareholders
or partners can exercise their rights to either buy or sell their business interest upon their retirement, death or disability. This enables the business to continue without interruption, liquidation or having to take on a new partner.
Furthermore, the proceeds from the insurance claims can be used to ensure that the deceased shareholder’s or partner’s estate receives the full value of his interest in the business, without dispute arising from the valuation of the business.
Deferred Compensation Planning
Disruptive staff turnovers are a bane for many business owners. For companies that pays attractive remuneration and offer retirement benefits for staff, as well as those who provide contractual retirement gratuity schemes for their employees; their profitability and cash flow will be affected in the year when employees retire.
With Deferred Compensation Planning managed through insurance, companies can offer their management team or long-service staff the benefits of a lump sum gratuity upon retirement. Alternatively, this gratuity payment can also be made in the form of a continuous monthly ‘salary’ using annuity. Both plans offer attractive packages that may help in reducing staff turnover and can be used as an effective recruitment tool. Best of all, the profitability and cash flow of the company will not be affected in the year of retirement of the employees.
Applying the solutions we have covered to the case study of Mr Tan as mentioned earlier, the situation could have been very different:
If Mr Tan had purchased Keyman Insurance on the life of Mr Cheng, the proceeds from the claims could be used to pay off creditors, ensure smoother running of the business and most importantly, maintain the same level of profitability for a number of years. It could also buy some time for Mr Tan to find and train a suitable replacement. In addition, if Mr Tan was able to offer a lump sum compensation to Mr Cheng’s family, staff morale will be given a boost.
Each company may have its unique risks to manage; nevertheless, the interest of the employees, the business and its owners should be protected. Although some may argue that the purchase of insurance for contingency planning is costly, the benefits of such provisions far outweigh the costs. The continued success and future potential of the business can be wiped out easily in the unforeseen death of a key person.
Some business owners today still fail to regard Corporate Risk Management through insurance as an integral part of corporate financial planning. They are in fact taking the gamble of not insuring themselves adequately. Even if the crisis that the insurance sought to cover does not occur, the accumulated cash value of the plan will be an attractive investment for the business owners, the company and the employees.
It therefore boils down to making a choice: Be prepared now or be overcome when the crisis strikes. By managing Corporate Risks through insurance, it is a win-win situation for all parties concerned.
You have learnt the importance of putting in place Corporate Risk Management from insurance for your business. Now take action – speak to us today!
