Financial risk management: Are you, your business or personal assets at risk?

Joel Gauntlett
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When it comes to thorough financial risk management planning, many Kiwi businesses have a ‘she’ll be right, it’ll never happen to me’ mindset and a far more relaxed approach than our overseas counterparts. Here in New Zealand, we need to develop a much higher awareness and acceptance of risk factors, and a greater willingness to protect against them.

A thorough financial risk management plan should include protection against financial loss due to the illness, injury, disability, or death of a working owner or ‘key person’. The financial impacts of these scenarios can be instant, long-lasting and in the worst-cases, terminal for your business and potentially your personal assets.

Taking out the most effective type of risk insurance – be it key man, disability & disablement, or life policies is typically the most cost-effective protection against severe financial losses - particularly when you compare this to the cost of scrambling for bank funding or potentially selling the business under a time of duress.

The true cost of injury, illness, disability or death

The cost and complexity of replacing key team members

Recruiting an acting managing director or senior executive at short notice is no easy or inexpensive feat. The situation becomes further compounded by the length of time this process takes and the availability of suitable candidates, especially in the current labour market. In the meantime, how will your business be impacted without key personnel at the helm?

Loss of staff and productivity

As the saying goes, “People follow people, not companies”, so the premature loss of an owner or key person could result in the departure of loyal staff, who are integral to the business operating effectively. This could not only affect immediate and future performance but profitability, your position in the market, and ultimately the business’s value. If a key staff member is fundamental in the day-to-day running of the business, you also need to consider how their absence will impact productivity and any future work in the pipeline.

Loss of ongoing revenue and lines of credit

Key personnel are likely to hold important customer and supplier relationships, which could be jeopardised if they suffered a long-term injury or disability. This is especially common in the SME space where the onus is on the owner to keep the business running. If this sounds like your business, now would also be a good time to start encouraging other team members to build relationships with your external stakeholders to ensure these networks aren’t lost if disaster strikes.

The owner/key person also typically holds the relationship with the business’ lenders, and in many cases has personally guaranteed business lending. Suffering from serious injury or disability could compromise the ability to obtain additional lines of credit.

Impact on business value

In the event the owner was permanently disabled or passed away, in many cases, the business would need to be sold if sufficient financial risk and succession planning isn’t in place. It’s highly likely the value would be negatively impacted as potential purchasers may consider it a ‘fire sale’ or at the very least, not as valuable as if the owner was functioning at full capacity. Often, a business sale will involve a handover period to help maintain value, transfer IP, and give time for introductions and the transfer of relationships between the new purchaser and the business’ long-standing customers. Without this, the ultimate sale price is likely to be less than it ordinarily would have been.

Funding the purchase of shareholding

If a shareholder suffered permanent disability or passed away and their shareholding needed to be purchased by the surviving shareholders, where would the funds come from? What arrangements have been made by the surviving shareholders?

Personal guarantees called upon

In the event the owner/key person suffered total disability or passed away, personal guarantees - for example, plant and equipment finance, leases, other business debt - could be called against their personal estate.

What’s your current risk level?

Consider these questions. If you answer ‘yes’ to any of them, it may be worthwhile considering a financial risk assessment.

  • Do you or another key person perform an active and integral role in your business?
  • Does your role or a key person’s role bring income directly into the business?
  • Do you or a key person hold I.P. relating to the business, the industry, or competitive advantage in some way?
  • Do you or a key person hold and manage business relationships that are key to the success of the business?
  • If you or a key person were to become permanently disabled or passed away:
    • would that impact business income or business value?
    • would a replacement for the respective role/s need to be found and how much would that cost?
  • As the business owner, if you became permanently disabled or passed away:
    • is there business-related debt that is personally guaranteed?
    • would you expect to be paid an ongoing income from your business?
    • would the business need to be sold?
  • Are there other staff within your business who are key to the performance, profitability, or future plans of the business?
  • For businesses with multiple shareholders, do you have a buy-sell agreement in place?
  • Is selling the business in the future part of your succession plan?

An effective financial risk assessment and mitigation plan will not only protect your business and personal assets, it’ll give you peace of mind if roadblocks to business as usual appear – and you’ll be better placed to think ‘she’ll be right’.