Ignoring Business Risks Could Mean Disaster for Your Family, Your Retirement, Your Business and Your Employees
As business owners, we expect and accept a certain amount of risk. If there weren’t any risk, then everyone would go into business for themselves. Like in life as in running a business, there are smart risks, calculated risks and completely random risks. Some risks can be mitigated against, and others fall outside of our control. What are the different types of business risks, and what are the business risk factors that we can prevent from impacting our family, the eventual exiting of our business and our employees?
We are talking beyond the risks of starting a business which can include abandoning a steady paycheck, sacrificing personal capital, sacrificing of personal time to keep the business going and the heavy reliance of cash flow when revenues are inconsistent. These are the risks that business owners take on when dealing with an established business.
1. Death of a Business Owner/Partner/Key Employee
This is one of the least probable but most insured against. It costs a relatively inexpensive amount to ensure a business owner. It costs so little because it doesn’t happen very often. In fact, there is a 5-10% chance of a business owner dying before the age of 65 (depending upon different variables like gender, smoking status). Often life insurance is taken out for Buy-Sell purposes and satisfying Partnership Agreements.
2. The Business Owner gets Sick
A question I often ask my business owner clients is “what would happen to your business if something should happen to you?” I usually hear that there’s life insurance to cover that risk. Then I ask, “What would happen if you were to get sick?” There’s usually a long pause and usually met with the typical “I’m not sure”. Of the business owners I talk to, less than 20% have critical illness coverage for the business. Whereas around 50% of business owners have life insurance. Yet there is approximately three times the likeliness that a critical illness policy will payout.
For those who have heard or researched Critical Illness and still not purchased, I’m usually met with “It’s so much more expensive than life insurance”. It more expensive because its probability of paying a benefit is significantly greater. For Business Owners, I encourage a Return of Premium rider that allows the business owner to potentially get all the Critical Illness premium back in a tax favourable way, should they stay healthy.
It’s amazing how many Partnership Agreements address a solution if one of the Partners should die, but more times than not, there’s no mention in the Agreement if one of the Business Partners should get critically ill or disabled.
3. Disability of a Business Owner or Key Person?
Like so many businesses, there is often a huge amount of the pressure placed upon the owner(s) of the business to drive sales, drive product development, marketing and the vision and direction of the business. But what happens if one of those individuals becomes disabled and can’t fulfil their commitment to the business. Huge pressure is put on the business, ownership group to either get that person back to work as quickly as possible, replace that individual or significantly change the direction of the business. Unfortunately, the expenses during such an event don’t disappear, and the business can be thrown into turmoil. There are insurance policies that cover business interruption in the event of such an occurrence. This can act as an influx of cash to pay the bills monthly. This could be salaries, rent and utilities, insurance, truck leases and other operating expenses that are essential to the running of the business.
4. The Risk of Not Selling Your Business
Many business owners have a plan for their retirement, and it typically entails selling their business. It could be to a family member, employee or outside third party. When the owners are asked, “what plans have been made to facilitate this sale?”, we often hear, “that’s many years from now”. The truth is, if you’re not thinking about this now, then you need to be looking at the worst-case scenario: Winding down the business. Whether this is a reality or not, financially, you need to prepare for this as an option. This could help to ease the stress on you mentally and emotionally. It will also not put as much pressure on attaining “the number” for the sale of your business to support your retirement plans. Plans for the eventual sale of the business, however far down the road that may be, need to be taken into consideration long before the reins ever change hands.
5. The Risk of Not Credit Proofing your Business and Your Assets
So how can you credit proof your business and your assets? You should consult your Accountant and Legal professionals to help structure your corporation(s) to safeguard your assets better. By having a Holding and Operating Corporation will help to insulate some of your assets within your organization from outside creditors.
By having your company sponsor your own Personal Pension Plan is another way to ensure that a significant amount of your retirement assets are safeguarded by outside creditors. Also, all existing RRSPs can be rolled into a Personal Pension Plan to ensure they are protected as well. Because these assets adhere to the Canadian Pension guidelines, they are protected from third-party creditors and Bankruptcy proceedings.
By putting cash assets into Segregated Funds versus an investment vehicle within the corporation will also safeguard many of these assets from outside creditors. Because a Segregated Fund is an insurance contract with a designated beneficiary, they do not fall under the same regulations as other assets within your corporation.
Chris Coulter is the Founder and President of The Finish Line Group. Chris works with business owners to leverage their businesses to increase their wealth, reduce corporate and personal taxes, create viable succession strategies, enable employee retention strategies and allow them to exit their businesses on their terms.
Chris’ passion for what he does evolve from the mistakes he made in his first business; by not diversifying his risk and not utilizing a lot of the opportunities within his business to create significant wealth. Chris found out the difficult way and now educates business owners on how to avoid many of his former oversites and ultimately control where their finish line ends.