Would Your Business Be Able to Survive Financially if You Lost a Key Person?
Last Thursday (14 September 2017) morning’s Melbourne Age newspaper carried an article about the famous Melbourne caterer Peter Rowland who at 79 years of age, had to sell his home in Toorak valued at $8.6 Million to save his catering business.
Peter had commenced his business in the 1960’s. He was able to afford his house due to the success of his business over many decades from humble beginnings. The article went on to say that Peter’s daughter Kate was his designated successor and had been involved in the business but had unexpectedly passed away at the age of 43 in 2014. Clearly, her death may have had an impact on the business over the last three years.
There are many businesses around Australia today that are passing from one generation to the next, and the reliance on the younger successor could be key in terms of the prosperity of the business in the future.
So how can business owners protect against a key person in the business not being able to carry out their duties going forward due to permanent incapacity on premature death?
Although not being aware of the financial circumstances of the Rowland Catering business, it appears its debts and poor profitability in recent times contributed to Peter Rowland having to sell his home. Clearly, there wasn’t a fall-back position to save the financial future of the business. However, given Kate was a key person in the business, could something have been done to protect the business should Kate have not been able to continue, as unfortunately occurred?
Now I’m going to raise some financial planning and insurance concepts here.
I’m not selling I’m just showing how the financial impact of losing a key person could be greatly reduced by some shrewd forward planning. I’ve kept the jargon to a minimum, but I’m sure you will agree, this makes good sense.
Let’s say Kate joined the business as Chief Executive Officer at the age of 40 and she was in good health at the time. Let’s also say the business success depended on her efforts going forward. Assume the business had debts of $8 million at the time. Now with Kate being a key person, life insurance, total and permanent disability (TPD) insurance and trauma insurance could have been taken out on Kate. Trauma insurance is only available for a maximum amount of $2 million (The maximum amount of TPD insurance a person can get is usually $5 million).
So, what would have been the cost of this insurance? The cost of this cover would have been $30 585.36 per annum which for a business employing 100 full-time staff and another 2 000 part-time staff would have been very affordable.
So let’s look at what would have happened at claim time. Let’s say Kate was diagnosed with cancer at the age of 41. The business would have been paid out $2 million under her trauma policy at the time of diagnosis. Then let’s say Kate did not respond to treatment and was diagnosed with terminal cancer, the TPD policy of $5 million would have been paid out. Finally, at the time of her death, her life insurance policy of $8 million would have also been paid out.
So, from this terrible incident, the business would have received $15 million, which would have cleared all the debts of the business, provided funding for Kate’s medical expenses not covered by Medicare and private health insurance and left the business with about $7 million in cash potentially to ensure financial viability. It would have also meant Peter Rowland wouldn’t have had to sell his home.
Does your business have key people within it? Would their absence have a material impact on its viability? If so what plans do you have in place as a business owner to cater for this scenario?
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
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