Source: Wealth Creator Magazine March/April

Such planning ensures a formal and legal response to protect all parties in the instance that a key member of the company can no longer work.

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Risky Business: It Pays To Face Reality

Source: Wealth Creator Magazine March/April

Risky Business: It Pays To Face Reality.

What would happen to your business if you didn’t wake up this morning? What would happen in your business today if you couldn’t work for the next six months? If you have a family business, how do you protect the interests of all family members?

Given that 83% of businesses in Australia are family owned and operated, one may assume these questions would be at the top of their mind for the patriarch or matriarch of the company. Yet the confronting truth is that most people tend to avoid these questions. After all, it is natural to presume that unfortunate things only happen to other people.

According to research conducted by Monash University , the combined wealth of family-run businesses is a staggering $1.2 trillion dollars, with almost half of them turning over in excess of $1 million each year.

With all this money changing hands, there is a lot at stake if something goes wrong. A closer look at the statistics of family-run companies, and the stakes are even higher. Almost 80% of the CEOs of these companies are between 41 and 65-years-old, and 40% of them have no life insurance – despite the increasing chance of serious illness or even death.

So what happens if something does go wrong? Will your business fall over if you do? And, more importantly, what are the implications for your family? These questions point to an urgent need for businesses to consider succession planning. The resulting plan should be a central tenet of any sound risk management strategy for family-run businesses.

In it together

For a family business, or any company that is run by a close-knit group of partners, the good and the bad times are shared by all. Business law dictates that each company Director is jointly and severally liable for any debts incurred. Put simply, this means that each partner/and or Director can be sued for outstanding debts on the business.

Depending on the structure of your business, if your business partner passed away, there is a possibility of facing debts alone. Do you have a plan in place to secure funding for the debt, or would you need to sell your family home? Who is responsible for shouldering the burden?

These are complex questions in what are often complicated scenarios. Yet the solution is simple if a formal business succession plan is in place. Such planning ensures a formal and legal response to protect all parties in the
instance that a key member of the company can no longer work. The key is to discuss and develop such a plan now, rather than later when there may be a death or major illness in the company.

Protecting the business

Consider this scenario. Peter is the owner of a successful transport company, which also employs two of Peter’s children and a son-in-law. Peter has recently applied for a $2 million loan to settle his divorce. The bank has approved the loan and most of the legal details for the divorce have been agreed upon.

Despite being in large debt, Peter manages the risk by seeking a Financial Planner to advise on the steps he should take to protect his own income and the business. Here is what ensued.

After an initial meeting, ANZ Financial Planning advised Peter that he needed to secure the future for the remaining parties involved in his business. To do so, a meeting was called between the ANZ Financial Planner, Peter and his family in the business. They identified where the business was heading and what Peter wanted from it now and in the future. They also discussed the events that could threaten his goals and what his plans were in place to deal with these. Peter had not previously considered what would happen if he died, became disabled, or couldn’t work for six months or more. Once he gave this consideration, he realised he held a number of goals for the business, specifically:

  • That it should continue to operate should Peter not be able to work for a time.
  • Debts would be paid out if Peter became disabled or died.
  • Business would transfer to Peter’s two children and son-in-law working in the business for an agreed value once Peter reached the age of 65, and an agreed value would also be paid to Peter’s other two children who did not work in the business.
  • Upon retirement, Peter would receive an agreed value as a lump sum.

From this analysis, a business succession strategy was developed that incorporated a combination of both advice and product solutions. Including business owner, loan and business asset protection, the strategy protected all parties involved in the business and minimised financial loss.

Now Peter can rest easy, as can all of his children knowing their business interests are protected. By speaking to the right people, who understood Peter’s business, his family situation and his long-term goals, a sound strategy was developed to mitigate risk and safeguard their future.

The choice is yours

It is simply a matter of finding the best product to match your risk management plan. Strategies may include:

  • Key person and business owner protection insurance
  • Business succession planning
  • Personal guarantor insurance
  • Loan protection
  • Business expenses insurance
  • Asset protection
  • Owner insurance.
NB: This material does not take into account your personal needs and financial circumstances and you should consider whether it is appropriate for you. This material is not a substitute for personal advice and shouldn’t be relied uponin anyway. ANZ recommends that you consult your financial advisor before deciding to acquire, hold or sell any financial product. ANZ Financial Planners are representative of Australia and New Zealand Banking Group Limited ABN 11005 357 522,the holder of an Australian Financial Services license.
Statistics about family-run businesses were commissioned by Zurich and conducted by Monash University.

 

Written by:

Mike Goodall The General Manager ANZ Financial Planning has held senior management roles with a variety of companies including AMP, Zurich, Associated Planners and ING. ANZ Financial Planning comprises over 300 advisors operating in over 700 branches and managing over $8Bn of FUM.