The role of insurance in asset, revenue and ownership protection as part of a succession plan.

Asset Protection
When asked about their most important assets, many business owners think of the physical assets of the business. Whilst these are valuable, it’s the key people and their knowledge that typically generate business profits.
Material possessions can always be replaced but the death or permanent disablement of a key person can be financially disastrous due to uncertainty around the future of the business.

Banks may get nervous and immediately call in any loans, forcing the business in some cases to sell assets in order to make payments. The flow-on effect of this, can be a fall in the credit standing of the business making it more difficult to renegotiate loans.

Having insurance in place to pay down debt, can facilitate the business in maintaining its asset base, freeing up cash flow and maintaining its credit standing

Revenue Protection
A drop in revenue is generally experienced by most businesses upon the departure of a key person. The resulting losses may be due to a variety of reasons including, expenditure incurred in securing and then training a replacement, errors of judgement from a less experienced temporary replacement and the reduced morale of employees, just to name a few.

It may take a substantial amount of time to find and train a successor and get the business back on track. In the meantime, client confidence can be lost, which puts additional pressure on revenue.

Having some insurance in place, can ensure that a revenue stream is available to help counteract any downturn in business performace associated with the loss of a key person.

Ownership Protection
A lack of succession planning can result in the failure of an otherwise successful business. If an owner dies, their equity often needs to be transferred out of the business to their family, which in turn places a lot of pressure on the assets and cash flow of the ongoing business operations.

If an owner is alive and wants to exit the business, they can negotiate with the remaining owners as to the terms. In the event of a business owner passing away, their estate will be negotiating on their behalf. In this scenario, it is often the case that the interests of the estate do not line up with those of the continuing business.

Disposing of assets or dipping into cash flow to buy out the deceased owner’s share of the business is unlikely to be an attractive option for many organisations. Having appropriate insurance in place to call upon in such circumstances, will provide a lump sum amount which can be utilised by the business to pay out the departing owner’s equity, allowing the remaining partners to keep the business going.

 

Should you have any queries in relation to this article or about how we can help your business with succession planning, please don’t hesitate to contact us.

Bruce Havilah

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