Corporate Solutions
Business to business
Key Person Funding Protection
Business Succession Planning is essential for most businesses.
Three common components addressed in business plans are business ownership, how debt will be dealt with and how your business will manage the death or serious illness of a key member. This article examines some of the planning and insurance solutions that may form your Business Succession Plan.
Key Person Insurance
Protecting the Brains Trust!
Most businesses take out insurance cover for assets, such as plant, equipment, vehicles and buildings. But what about your most valuable assets - the people who manage the business, drive profits, pioneer technology?
A key person is someone whose ongoing contribution provides your business with value that would be difficult to replace. In many instances the key people are the business owners themselves. But as your business grows, you may seek other highly qualified employees that make a significant impact on the growth of your business. Some examples of a key person within your business may include:
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Managing directors and working directors
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Sales managers who have personal relationships with your main customers
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Financial controllers
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Computer programmers who drive technology within your business
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Specialists whose unique skills are used to provide your business’ services
Even the largest listed companies have strategies in place to manage risks such as the death or serious illness of key employees such as CEO’s and chief financial officers. Many companies won’t allow all of the senior executives to travel on the same flight for this very reason!
Key person insurance can compensate your business for potential lost remuneration due to the death or incapacity of a key person. Insurance proceeds can compensate your business for the loss of two different qualities.
The first is business profitability (revenue purpose). Insurance proceeds can be used to replace the revenue the key person would have generated and pay the extra costs of recruiting and training a suitable replacement.
The second quality is the capital value of the business (capital purposes). Proceeds could be used to reduce the impact of lost goodwill and credit standing as well as enabling debts to be repaid and/or easing the financial burden on your business.
Case Study
Peter, John & Tony’s story
Roof Mates Pty Ltd is a business based in Adelaide and has three employees.
Tony (26) does all of the installation of the roofing, Peter (42) does the accounting and administration, while John (31) does the sales and marketing to attract new clients. Business revenue quickly builds up to $30,000 per month.
Regretfully, ten months later Tony falls from a ladder, becoming a paraplegic, and can no longer work. Peter and John do not have the expertise to install roofs.
Consequently, they have to find a skilled employee to replace Tony; however, they are unable to attract an experienced person, as the business is relatively new and potential employees do not want to risk moving across to such a new venture.
As a result, Peter and John have to advise clients that they can not complete the roof installations they have booked in. Clients go to competitors to get their jobs done and, within a few months, Roof Mates Pty Ltd closes down.
Could this have been avoided?
If Roof Mates Pty Ltd had undertaken contingency planning, a trauma policy may have been taken out to insure Tony’s. The sum insured should have been enough to cover revenue losses for say six months ($180,000) at a cost of around $300pa*. The insurance funds could then have provided a cash injection into the business upon Tony’s paralysis, allowing the business to show a strong financial position and attract a replacement for Tony.
* Premium illustration prepared by Comminsure on 10 January 2007, based on a male aged 27 next birthday, non-smoker, roof-tiler with 3 years+ experience living in SA.
