When you say ‘business insurance’ most small business owners think of short-term insurance to cover loss of or damage to their equipment and vehicles, or liability insurance to cover claims against the business. If they have that, they assume they are sorted. Whether you are the sole owner of the business or have business partners, or are a key person on whose skills the business relies, there are a number of important scenarios to consider.
What happens if you die or a business partner dies? Or you have an accident and are no longer able to work? What impact will this have on your business?
There are three main things to consider ensuring that an unforeseen tragedy doesn’t also sink your income.
The first one is business continuity. On your death or permanent disability, your partner has, in terms of the law, the first option to buy your shares in the business from your estate, provided, of course, he can afford it. If he can’t, he may offer a price far less than the true value. Either your executor will sell your shares for less than they are worth or the shares will pass to your heirs in terms of your Will. You could find yourself having to consult with your partner’s spouse or heirs, as the new shareholder, even though they are not working in the business.
A buy and sell agreement is a win-win arrangement
i) Your estate sells your shares for their true value, so your heirs inherit the fruits of your labours, and
ii) your shares will be automatically transferred to your co-shareholder, who retains control of the business. The purchase price is funded by cost-effective life insurance.
A second consideration would be to assess if the business is largely built around special skills. If there are certain skilled individuals who either have unique abilities or relationships it may be prudent to make sure that you cater for the impact of loss associated with losing them.The business can take out a Keyperson policy and receive a cash amount if the person lost through death or disability was a key individual to the running or success of the business.
Thirdly, debt! All businesses make use of credit facilities. In many instances, the owners have lent their own money to the business, and want it repaid to their estates on death or prior disability. A simple business-owned policy paid for by the business can settle the debts and leave the other owners in a much stronger position to carry on.
The above three focus areas are important to allow your business to flourish after your death or disability while releasing the value of your labours in the form of a cash payout.
What is often forgotten, though, is your PERSONAL ESTATE and the need for cash in your estate to pay various expenses. Naturally, a well-drafted Will is vital to ensure that your heirs are protected.
Most estates in SA find themselves short of cash to pay expenses such as executor’s fees, Master’s fees, CGT, arrear income tax, mortgage bonds, other loans, and, in some cases, estate duty. The maximum rate of CGT is an effective 18% and estate duty 20% (or 25% for amounts exceeding R30 million).
Putting these insurances in place is as important for a business as it is for an individual to have a Will. The correct structure and implementation of these specific types of insurance will, settle liabilities, ensure continuity of the business, and provide the assurance that your beneficiaries get what is due to them if and when the times comes for a claim. And the premiums are far more affordable than you might think.
Here is an example:
A business worth R1 million which you built from scratch: You are the only shareholder. You die. You leave behind 3 children but no spouse. Ignoring the exemptions, the maximum CGT your estate will have to pay in respect of your business is R180 000 (ie 18%) and the attributable estate duty is R200 000 (ie 20%). Naturally, each person’s estate and testamentary wishes are unique, and planning needs to be done taking your specific circumstances into account. Depending on your age and health, the premiums to cover you for peace of mind are a few hundred rand, if that.