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Beat the risk with these 6 steps to protect your start-up
You’ve got funding, premises, marketing and employees sorted for your start-up – but what steps have you taken to ensure that you and your new business are insured from potential situations that could put you out of business?
No one likes to think about all the things that can go wrong when they’re starting a business. As an entrepreneur, you’re positive, passionate and focused on your goal. Thinking about all the personal and operational risks facing your start-up is the exact opposite of that mindset.
Or is it? As someone who is focused on the solution (and not the problem) you need to recognise risks in order to plan for them and solve them.
Here are six key areas that could cause business failure – and the risk management strategies to make sure that doesn’t happen.
You and your business: Personal Risks
As the founder and owner of your business, its success is completely dependent on you. This is why you need to consider what happens to your company if something happens to you.
1. Personal Dread Disease and Disability Cover
A health emergency or disability doesn’t have to threaten your personal finances or that of your start-up. Disability and dread disease cover offer a silver lining in a difficult health situation.
- If you become chronically ill or disabled, you can no longer make a living running your own business.
- Insurance against dread disease and disability ensures that your health doesn’t affect your bottom line and your ability to run your business’s finances successfully.
- Depending on what type of severe illness or disability cover you take out, you can receive a tax-free lump sum for each dread disease claimed for.
- This amount gives you immediate access to funds that will keep your business running in your absence, because you can hire the people you need to take care of things for you.
- Insurance will also cover your own personal costs, as you will be unable to draw a salary from your business.
Now that you’re personally covered, have you considered what happens when your accountant, chief supervisor, senior executive or another key person in your business can’t work because of illness or injury?
When starting a business, you may not have a lot of staff members. The employees you do have are core to the business, and usually play more than one role.
- This means that if they fall ill or get hurt and you have no one to do their work, your start-up will be in trouble.
- Keyman insurance protects against business risks involving partners in the business, senior executives and others critical to running the business.
- Your policy will pay out a lump sum in the event of any of your specified key employees becoming severely ill, disabled or dying.
- Depending on the plan you choose, your business can be protected if the person standing surety is unable to do their job or any reasonable job.
Estate Planning for business owners
None of us like to think of our death, but one of the responsibilities of launching a business is to do just that. You’ll have employees, perhaps a family who is supported by your business. What happens if you’re no longer here?
a) Succession Planning and Having a Will
When you die, what happens to the business? Does it just shut down? Can it be transferred? If your business starts and ends with you as the owner, then it won’t necessarily survive without you. A succession plan outlines who will take over your role after you leave the business.
Plan for the future and keep your hard work going long after you’re gone. Consider a succession plan and include your business’s successor in your Will.
There is another option though. As the founder of an owner-dependent business, you might not want anyone else to take over the reins after you die.
It’s important to ensure your family and estate planner are aware of your plans to either close down or transfer your business’s ownership. If no-one knows exactly what your wishes are, access to business accounts and key information could be locked while everything is being legally settled, including your estate and the business’s day-to-day operations.
Transfer of ownership
- Your Will is part of your estate plan. This is where you direct how you want your assets transferred after you die. One of those assets is your business.
- Executor of your Will. The person you choose to take over your affairs will most likely be the same person with power of attorney to fulfil the roles you no longer can in your business.
- The same applies if you choose to retire and keep your business running.
- Avoid disputes. If you haven’t stipulated who should take over ownership of your business when you die, it could result in on-going disputes between stakeholders and family.
- Buy-out clauses. Should you have a business partner, consider putting a buy-out clause in place, so if one dies, the other has first option to purchase their shares for an agreed-upon amount.
Termination of business on death of owner
If you’re the centre of your business and it depends on you to keep running and to make money, it might be best for everyone – including your employees and family members – if the business closes down if something happens to you.
Here are your key points of action if you believe the business is better off closing without you:
- Keep valuations current. You need to ensure that your intentions to close the business down upon your retirement or death are documented or the valuation could be incorrect. Your family could pay out taxes on a business that is worthless after your death, but had a higher, documented value while you were alive.
- Minimise risks. Recording your intention to close the business upon your death could protect your family against business risks like outstanding estate tax, even after your business has actually shut its doors for good.
- Highlight why it’s better to close down. The aim is to mention reasons the business shouldn’t be transferred to someone else by outlining its limited value without you.
Business operational risks: Insurance for business
Starting a business and running it successfully is a formula some start-ups struggle with – in the beginning. As you find your feet, it’s important to cover the essential aspects that keep your business profitable, including debtors, equipment and premises.
Essential Business Insurance
Start-ups generally aren’t thinking of damage to property, loss of stock, breaking down of machinery and vehicles, and business closure. But a business owner needs to protect the company against these business risks.
- Protect against the unforeseen. Essential business insurance lessens the blow of any unfortunate situations that could have dramatic effects on your ability to keep your doors open and remain profitable. For example, a fire, severe damage to critical equipment or any other risks that could halt business activities.
- Keep the doors open. The amount you pay monthly may feel like a grudge purchase, but the lumpsum your business will receive in the event of theft, damage or temporary halting of operations will help keep your company going when faced with events that could result in most businesses closing down.
Business Interruption Insurance
Business interruptions are anything that prevent you from your normal day-to-day operations. This could include anything from your entire team’s laptops being stolen, leaving them unable to work, to your warehouse being flooded, ruining your products.
Is your business covered for loss of income in the event of a natural disaster, accident, theft and other interruptions to your daily operations?
- Plan for the unexpected. Business interruption cover, also known as business income insurance, offers financial security against business risks when business-as-usual isn’t an option. This is usually for reasons out of your control. For example, industrial action can mean a halt in production and unhappy paying customers taking their business elsewhere. Or consider the effect of a burglary of essential company equipment. Can your business survive?
- Don’t let unforeseen events hurt your business. Your income loss is covered should your business need to be closed temporarily, rebuilt or renovated. These interruptions don’t need to impact your bottom line.
Customer Non-Payment Insurance/Debtor Insurance
What happens if your invoices aren’t paid and the bills are piling up?
- Protect your cash flow. You can insure your start-up against the business risk of non-paying customers to prevent temporary or permanent financial distress.
- Keep things running smoothly. Credit insurance protects your bottom line from defaulting clients and keeps your business running smoothly, without tying up your cashflow.