Ten questions every business owner must answer
The first of ten questions every business owner must answer is:
Have you had a recent health check and ensured you have adequate life insurance, income protection and/or disability insurance?
This is a really important consideration for all business owners, yet many have no insurance cover in place at all.
Depending on your business, you will need to identify the key people without whom the business would struggle to continue to generate an income. In many cases this will be you the owner, however it may also be an employee.
By taking out insurance policies on the key person, the business will avoid financial strain in the event of this person being unable to work due to illness/injury or worse, death. The value of the cover required would depend on the key person’s value to the business. An experienced insurance adviser will be able to help you determine this.
Another big consideration in this area is in business partnerships.
Have you ever stopped to think what would happen to your business (and your own financial security) if your business partner was no longer around?
In all likelihood, the deceased partner’s shareholding would pass to his/her estate. Ultimately you would now be in partnership with someone else (wife/husband/child). The deceased partners dependents may not even wish to go into business. They may prefer to have the value of the shareholding paid to them to cover their own financial needs. In this case, either you would need to come up with the funds to buy them out, or they’ll be forced to sell to another shareholder. This could result in a negative outcome for all.
A simple solution is for the business to take out insurance policies on the lives of all partners, for the value of their relative shareholding. The proceeds could be used to buy out the deceased partner’s dependents in the event of death. There are a number of ways to structure this and professional advice should be sought.
The final question on the list is:
Have you looked at the spread of your total wealth to lessen the risk of financial ruin should the business stagnate, or fail?”
This question really hit home for us when we often dealt with pre-retiree clients who built an incredible business over their lifetime. In these cases all of their wealth is tied up in their business.
They often have little superannuation and not much more than the family home.
There are a couple of problems with this.
Firstly, although the business may have been producing decent revenue and supporting a comfortable lifestyle, if the ultimate sale price isn’t as high as expected, all of the hard work over the years may have been in vain. Worse still if economic/market/legislative conditions change drastically. There may not be a business sale at all, simply a closure.
If you haven’t ‘banked’ some of the proceeds along the way you may be left high and dry.
Secondly, suppose you are able to sell the business for the desired price at retirement, you will then have a large lump sum generating taxable income sitting outside the superannuation environment. (Remember, income streams drawn from super over age 60 are completely tax free).
If you’ve owned the business for more than 15 years, you may be able to utilise the lifetime superannuation CGT cap and contribute up to $1,205,000 into your superannuation which is a start, however depending on the sale price of your business this may still leave you with a large asset generating taxable income for the rest of your life.
For younger businesses (and younger business owners), it is important to keep contributing to your superannuation up to the pre-tax limit of $25,000 annually. Lock away some of the rewards of being in business for later on in life.
You should also consider diversifying your wealth into other assets (such as shares, managed funds or property) over time. That way you’re not completely leveraged to your business.
Unfortunately, businesses can, and often do fail. So it’s important to not let a business failure mean complete personal financial ruin as well.
Need some help with these questions for business onwers? Our Financial Coaches LOVE helping members with their goals and working out how to attach money to them. To chat money with one of the WE team, book in a time for a Free Strategy Session.
Disclaimer: Information contained within this article is of a general nature. Do not be rely upon it when making financial decisions. Please consult a professional financial advisor or planner (like us!) before acting.