Need assistance with your policy? +234 1 271 9393Make a Claim
Keep Your Family Business Safe From These 7 Risks
Around the world, the mistake many family-run businesses make is thinking that they aren’t as formal as other businesses. This is not only your nest egg – it’s your whole family’s. Here’s what you need to do to protect it.
Some of the biggest businesses in the world started out as family-run businesses:
- Sam Walton launched retail giant Walmart, and his children still own 50% of the shares in the business.
- Lee Byung-chul started Samsung way back in 1938 and his children are still heavily involved in the tech titan’s success.
- Phil Knight’s son, Travis now runs apparel brand Nike.
Family-owned businesses can be incredibly rewarding, especially when you’re a close-knit and dedicated team pursuing a shared vision. Unfortunately, the risks are also high – especially if all of your eggs are in one basket and the business goes bust.
Focus on these seven risks and you won’t only protect your business and its employees, but your family’s future as well.
Risk no. 1: Not formalising contracts
When you allocate positions in your family business, consider everyone’s personal skills, talents and roles so that you can find the best fit for them. Your aim is to create structure and build a professional business, as well as keep everyone accountable to the company’s goals.
Why should family members in family-owned and run businesses have formal contracts?
Documents like shareholder’s agreements and employment contracts help you to avoid any potential family conflicts. Unlike verbal agreements, detailed (and documented) job descriptions leave little room for workplace conflict.
Risk no. 2: Not having a business valuation early on
Most business owners don’t focus on their exit strategies. You could spend years working in your family business, only to find that you’re unable to sell the company one day. Ensure you’re building an asset of value so that when selling to potential buyers, they see evidence of regular, consistent growth within the business.
A trustworthy valuations company will help you get the correct numbers so that you can be proactive about the changes you need to implement to build your business up into an asset of value. This also gives you a leg up when planning an exit strategy and building your personal wealth.
Risk no. 3: Not taking life cover and income protection
Dread disease and disability are the last risks anyone wants to think about – least of all in a family business.
Why you should consider life cover
A common issue when wrapping up an estate is a shortage of cash to settle the estate’s liabilities. This leaves the surviving family members with no choice but to sell assets like their home. Keep your estate liquid with affordable life insurance cover.
Why you should consider income protection
Disability is often covered with capital or lump sum policies because these have cheaper premiums. It’s a family business risk, because these policies can fall short if you’re disabled at a relatively young age and have more years of working ahead.
Risk no. 4: Not having key man insurance in place
It’s never easy facing the loss or incapacitation of a family member. It’s even more difficult when that person plays a key role in your family business.
Keyman insurance covers the life of a key person in your family business in the event of their death. The loss to the business is recovered through the insured amount from the insurance company.
How does it differ from life insurance?
Life insurance can be an investment or act as a protection policy for the beneficiary, usually the family. The pay-out amount can be used to settle a bond, credit card and education for children.
A keyman insurance policy, on the other hand, covers the expenses of the business’s transition without the keyman, as well as outstanding business debts or assets.
Risk no. 5: Not saving for retirement
Entrepreneurs often choose not to invest in savings or investment plans, believing instead that their business will provide the funds they need to retire.
The reality is many businesses either eventually close down, or cannot be sold. Your family’s business risk increases when everyone’s relying on the business’s future revenue.
Risk no. 6: Not protecting family assets in family trusts
Don’t leave out a trust when planning your estate. Simply put, a trust is formed when a donor gives a trustee control of their assets while the donor’s alive or upon the donor’s death.
The assets are then given to the trust’s beneficiaries.
A trust can’t be owned, sold and transferred, as it can’t exist independently like a company can. The trustee controls all assets on behalf of the beneficiaries of the trust. Before starting a family trust, go over the pros and cons with an expert financial planner.
Risk no. 7: Not conducting succession planning & estate planning
Estate planning should form the cornerstone of all family business succession discussions. Ensure everyone’s wills are up to date. Family dynamics shift and there can be changes in asset ownership.
The last thing you need is conflict when everyone is mourning the loss of a family member. A list of where all important information can be found should be given to a trusted person as well.
Active succession planning within the business also equips the next level of management and outlines a suitable exit strategy.