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Personal Risks in Small Business
There are so many risks in small business that it’s impossible to list
them all. Many events can put a business out of business and it’s the
responsibility of owners and managers to somehow anticipate and deal
with them.
You’ve probably insured your
business for the most obvious risks – storms, fires and theft for
example, but what happens if you lose one of the key people that keep
your business going? ‘Key Person’ losses are some of the most damaging
to any business, especially smaller organizations.
What do you think would happen to your business if an accident or
illness made it impossible for you to work? What if one of your business
partners or your best salesperson was killed in an accident? It’s not
pleasant to think about but you do have to ensure that your business
survives if a key person – yourself included, is disabled or dies.
Ask Yourself These Questions
There are questions you need to answer before anything happens. After
the event it may well be too late. First, consider how the business will
keep going if you’re out of the picture, even if it’s just for a short
time:
- What will pay you an income while you’re incapacitated?
- Who will take over your role in the business; how will they be paid?
- How will your medical costs be paid?
- Who will have your power of attorney if you’re unable to make
decisions?
These are difficult questions but they need to be thought through with
great care and given answers while you’re still there to make them. Now,
what happens if you should die? It could also be the death of the
business unless you’ve made sufficient plans.
- Do you have a will that stipulates who inherits your share of the
business?
- If a family member is to take over from you as head of the business is
this stated in your will?
- If the business will be sold after your death, who will be the
administrator of the proceedings?
Do you have a partnership?
In the case of a partnership, unless the partners have prepared some
other binding arrangement a partnership is dissolved when one partner
dies. All the surviving partner can do is to wind up the affairs of the
partnership. This can
- Is there an agreement between the partners for the surviving partner
to purchase the deceased partner's interest at a prearranged valuation?
- Is there life insurance in place that will provide funds for the
surviving partner to purchase the interest of the partner that dies?
The situation can be even more complex if the business has several
shareholders and one of them dies. Conflicts between the surviving
shareholders can lead to failure of the enterprise unless suitable plans
have been made to handle the situation.
- Will other shareholders have first right of refusal to purchase the
shareholding of the deceased?
- Is it acceptable for the deceased shareholder’s heirs to take over a
role in the business?
- Will the heirs sell their inherited share of the business?
Loss of Key People
And what would happen if you were to suddenly lose a key team member -
the sales manager or the office manager for example, because of illness,
disability or death?
- What impacts will that person's absence have on the business?
- How will you the missing person's business functions be performed?
- What additional costs will be incurred to find a suitable replacement?
- How long will it take before the replacement is sourced and becomes
fully productive?
These are tough questions, but
businesses have failed because they didn’t bother to address these
issues in time.
Because there are legal, financial and organizational matters involved,
you may want to form a risk management team of your legal advisor, your
business development advisor and accountant and your insurance broker to
guide you in creating a plan that will ensure your business survives
these potentially disastrous events.
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