Personal Risks in Small Business

There are so many risks in small business that it’s impossible to list them all. Many events can put a business out of business and it’s the responsibility of owners and managers to somehow anticipate and deal with them.

You’ve probably insured your business for the most obvious risks — storms, fires and theft for example, but what happens if you lose one of the key people that keep your business going? “Key Person” losses are some of the most damaging to any business, especially smaller organizations.

What do you think would happen to your business if an accident or illness made it impossible for you to work? What if one of your business partners or your best salesperson was killed in an accident? It’s not pleasant to think about but you do have to ensure that your business survives if a key person, yourself included, is disabled or dies.

Ask Yourself These Questions

There are questions you need to answer before anything happens. After the event it may well be too late. First, consider how the business will keep going if you’re out of the picture, even if it’s just for a short time:

– What will pay you an income while you’re incapacitated?

– Who will take over your role in the business; how will they be paid?

– How will your medical costs be paid?

– Who will have your power of attorney if you’re unable to make decisions?

These are difficult questions but they need to be thought through with great care and given answers while you’re still there to make them. Now, what happens if you should die? It could also be the death of the business unless you’ve made sufficient plans.

– Do you have a will that stipulates who inherits your share of the business?

– If a family member is to take over from you as head of the business is this stated in your will?

– If the business will be sold after your death, who will be the administrator of the proceedings?

Do you have a partnership?

In the case of a partnership, unless the partners have prepared some other binding arrangement a partnership is dissolved when one partner dies. All the surviving partner can do is to wind up the affairs of the partnership. This can

– Is there an agreement between the partners for the surviving partner to purchase the deceased partner’s interest at a prearranged valuation?

– Is there life insurance in place that will provide funds for the surviving partner to purchase the interest of the partner that dies?

The situation can be even more complex if the business has several shareholders and one of them dies. Conflicts between the surviving shareholders can lead to failure of the enterprise unless suitable plans have been made to handle the situation.

– Will other shareholders have first right of refusal to purchase the shareholding of the deceased?

– Is it acceptable for the deceased shareholder’s heirs to take over a role in the business?

– Will the heirs sell their inherited share of the business?

Loss of Key People

And what would happen if you were to suddenly lose a key team member – the sales manager or the office manager for example, because of illness, disability or death?

– What impacts will that person’s absence have on the business?

– How will you the missing person’s business functions be performed?

– What additional costs will be incurred to find a suitable replacement?

– How long will it take before the replacement is sourced and becomes fully productive?

These are tough questions, but businesses have failed because they didn’t bother to address these issues in time.

Because there are legal, financial and organizational matters involved, you may want to form a risk management team of your legal advisor, your business development advisor and accountant and your insurance broker to guide you in creating a plan that will ensure your business survives these potentially disastrous events.

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Copyright 2005, RAN ONE Inc. All rights reserved. Reprinted with permission from www.ranone.com.