Keeping Things Running in Times of Crisis

21 August 2015

Sixty-seven percent of businesses that stop trading do so because of the death, serious illness or injury of a key person. Typically the key person or “Rainmaker” generates up to 70% of a company’s revenue, and it is important to think about what would happen to the company without the continuation of that sort of income stream. Could the revenue lost by the absence of the key performer be quickly replaced by the remaining staff, and would they be able to cope with the extra workload, or would the business have to go through the expensive and time consuming process of finding a replacement and training them?

So, who are the le to your business or the company where you work? Is it the top salesperson, the most experienced team member or manager, or as is the case in a lot of small to medium size enterprises in New Zealand, a partner or co-director? Should one of the owners of the company become critically ill or die, they or their family members may wish to sell their share of the business. If a business partner is not in a position to purchase, then the shares could very easily be purchased by a competitor or some other unsuitable buyer. You may even need to buy your partner out to keep a controlling interest, and in the case of a traumatic illness such as a major heart attack, there may be uncertainty over the likelihood of the business owner recovering or ever returning to work. Any of these things could lead to you becoming one of the 67% and having to wind up or sell the business!

Statistics tell us that 2 in 5 males and 1 in 4 females over the age of 30 will suffer a critical illness before the age of 65. Now, you could surround yourself with very unhealthy friends and colleagues who are more likely to suffer the trauma than you to improve your odds, but that’s not a very good guarantee. So the wise option is to have a plan B ready just in case. 

So what options are available to you to raise funds should a crisis happen?

Option 1 is to borrow money. However, it is unlikely that you will be approved for any new debt when the reason that you require the money is due to the loss of income caused by the absence of your main revenue earner. Lenders over the past few years have become very driven by a requirement that the provable income should be enough to service the debt, and the lack of a key person in the company is going to be very detrimental to this need.

Option 2 is to sell assets, which is fine if you have plenty of liquid assets to sell and can raise the right amount of capital, yet the last couple of years have seen an erosion of the equity that a lot of people previously had as a buffer. The ongoing economic climate may also lessen the number of buyers that are prepared to pay fair market value for those particular assets – therefore you may be in a position where you have to sell for much less than their current value.

Option 3 is to use Insurance which you have taken out previously to cover you against such crises as the critical illness or death of a key person. Insurance is the cheapest and most accessible form of protection for your business. It can allow the business to continue to meet its overheads. It can assist in finding a replacement for that key person. It can provide you with a monthly payment equivalent to the income generated by the key person for the entire time that they are unable to work. It can also relieve the pressure on the sick/injured person to get back to work, meaning that they can make a full recovery and return to work once they are 100% fit and ready to do so.

There are various types of Key person and shareholders protection insurance available and the type to provide the maximum benefit to you will vary depending on your business, your budget and the priorities of the company and its owners. It is important therefore to discuss your requirements with an insurance adviser who can tailor a package from a range of providers to come up with the best option to suit your own particular needs.


Published In Whakatane Beacon

This post was written by

John White - who has written 90 posts

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