Most likely you consider your business an asset, perhaps one that you expect to one day use for income in your retirement years. While that is often the case, there are also risks to that strategy that you may want to consider before counting on your business as a reliable asset in your golden years. Proper business planning can ensure that your business is in the right position to find a buyer and has the correct systems in place and recorded as such; however, even with the correct business planning having been done, there are still many potential risks. You would be wise to consider all the possibilities- even the ones that sound implausible, and contemplate ‘what would you do’ in a variety of circumstances.
Some examples:
- What if you are in business with another individual and they die or become ill- you may lose invaluable and irreplaceable information and skillsets that have become essential to the company.
- What if that person had a registration that you do not– i.e. solicitor, doctor, builder and you’ve relied on their connections?
- What if a personal matter such as a divorce results in a key player leaving the business?
- What if you’ve along the line borrowed money to fund stock, equipment, or working capital or a given personal guarantee to a lender of supplier?
These types of risks are quite serious and should be carefully considered with contingency plans prepared well in advance of any signs of trouble.
If you have been in business with someone else:
What could be the impact to you and the business if they are unable to continue or do not wish to continue to be involved with the company at some time? Would you want to/be able to fund/finance a “buy out” of their interest in the business? Do you have an established method set in place for buyout calculation and payment? Are there any shareholder/director loan accounts and if so, what would you do with them in a buyout situation? What about any intellectual property rights- would they pass over to a formed “new Business” entity? Would the estate be willing (or even able within a suitable time frame) to sell? What if you were to find yourself in business with the deceased partner’s spouse? How could things possibly change for you if that spouse later remarried? What if it was you who had died? Is the company properly prepared to continue in your absence? How would your spouse and family fare if they still owned your interest in the business?
If you rely on the unique skills or connections of another for your continued business success:
What would happen if that person died or was incapable of continuing to be involved in the business as a result of an injury, illness, or disability? Could you quickly and effectively replace those skills and/or remake key contacts? Would your revenue reduce and turnover drop off? Could your customers perhaps take their business elsewhere? Would your product or service still be deliverable? Would the capital value of your business potentially suffer?
If you’ve borrowed money to fund purchases of equipment or working capital or given a personal guarantee to a lender or supplier:
What would be the possible result if a business partner died or was incapable of continuing to be involved in the business as a result of disability, injury, or illness? Would the lender request for the loan to be repaid and if so, under what terms. If you were not immediately able to repay would your personal guarantee mean you might lose your home or other personal assets? Could your suppliers cut off your credit and/or close your accounts? Would you qualify to refinance the loan in your own right?
These example events as described above could become threats to you, your family, and your future financial and emotional well being. The good news is that a sensible and well executed risk management strategy will help reduce these risks to manageable proportions. You would be well advised to consider what you would want to happen if you were faced with situations such as we’ve described. Then, consult with a solicitor who can help you put legally binding agreements in place to lock in your expressed wishes and provide appropriate and economic funding mechanisms so that your financial security will not be derailed by the unexpected.