With the limited resources available in a small business, any major disruptions or costs can have detrimental effect on the health of the business. Another layer towards the protection of your business and family’s assets in case an adverse event should strike are insurances and legal agreements.
Having a “will” for your business lets you decide what happens to your business if you can no longer continue working in your business, whether by choice or by unfortunate events. Right now, whilst you are in a position of control, is the time to have your exit strategy ready.
Most people understand and may even hold life insurance policies, but other business-oriented insurances may be less well-known to small business owners. However, there is no reason why small business owners should not consider these insurances and legal agreements.
Insurances
Public liability and professional indemnity insurances
If you interact with the general public as part of running your business, there is always a risk that an accident could happen.
Public and products liability insurance provides protection to your business in the event someone in the public is injured or has their property damaged due to actions associated with your business or products (even if not caused by you, but by say a contractor of your business). Public liability insurance covers the legal cost of defending the claim and towards any legal settlements you are liable to pay.
Professional indemnity insurance is an additional type of insurance that protects you against claims of losses as a result of actual or alleged negligence or omissions for businesses that provide specialist services or professional advice. This is as relevant for engineers as it is for doctors, as well as for lawyers or business consultants.
While there is generally no legal requirement to take out such insurances for your business, it is commonly a mandatory requirement of many professional licences.
Business interruption insurance
This type of insurance is like income protection for the business. It helps pay things such as rent, utilities, and administrative staff in the event that a major disruption occurs to the business, including catastrophic events to the business premises or to the owner/ key person. If you can’t afford to put your business on pause, you should consider insurances to protect yourself.
Key person revenue insurance
This product protects the business from any debts or the loss of revenue it may experience in the event of the death, serious illness or injury, or total and permanent disablement of a key staff member who makes significant contribution towards overall revenue and profitability of the business, such as yourself or another senior person in the business.
Income protection insurance
This strategy is designed to help replace income of a business owner or key person if they were unable to work due to serious illness and/or injury. This can help you towards meeting both your personal family costs as well any business obligation you may be personally liable for.
Life insurance (funding Buy/Sell Agreement)
A businessowner’s life insurance policy can be designed in a way that funds a Buy/Sell agreement that is triggered upon the policyholder’s death or permanent disablement. This ensures that the proceeds of a life insurance policy can be put towards the execution of the Buy/Sell agreement and not leave the remaining business partner(s) or the spouse/family of the deceased out of pocket unable to fund the execution of the agreement.
Legal agreements
While insurances are designed to protect the business and business owners financially, proper legal agreements can protect the business and business owners legally. Such legal risks are higher when you go into business with another person, especially if they are not your family.
We recognise the following legal agreements as must-haves:
Shareholders agreement
In its most basic form, a shareholders agreement simply sets out rules and expectations of shareholders in the ownership of a company and the operation of a business by the company. This is most relevant where shareholders are unrelated and/or have different roles in the company. The purpose of a shareholders agreement is to set out in writing the expectations of each other to avoid future conflicts and disagreements.
Note, the same applies to any other business structure, including unit trusts or partnerships.
Buy/Sell agreement
A buy/sell agreement is a legal agreement whereby you and any business partners agree on how to transfer ownership should you or any of your business partners decide to or are forced to leave the business for any number of specified reasons, including but not limited to, retirement, bankruptcy, death, and/or disablement. It provides certainty upon death/disablement on who will purchase the business share, how the purchase will be funded and what price will be paid. It may also include provisions to extinguish personal guarantees. A funding mechanism is normally attached to the legal agreement, which may come from a life insurance policy on the businessowner. See ‘Life insurance’ section above.
Business continuity plan
A business continuity plan involves developing a practical plan for how your business can prepare for and continue to operate after an incident or crisis. This could include natural disasters, pandemics, cyber-attacks, loss of key management personnel or any other events that may cause a significant interruption to your business. Your business continuity plan should contain all the information you need to get your business running again after an incident or crisis. This may include operating remotely from your normal place of work.
To get the most out of a business continuity plan, you should include a schedule for testing and updating it, making sure you take into account any changes to your business, your industry, or the location you operate in.
Employment contracts
While employing staff may appear to be a simple task with standard employment contract templates readily available online, a strong employment contract that has been properly drafted and reviewed by an employment-specialist lawyer could help protect your business from unscrupulous or malicious employees, especially those hired at higher levels. An ineffective employment contract may expose you to litigation including breach of contract or unfair dismissal, which would waste both your time and money, something that could be avoided with proper tailored legal contracts.
Discomfort or Regret?
Whilst this isn’t the most comfortable topic to discuss, by going through the discomfort now you and/or your family can avoid the regret later of not having a plan.
Prosperity is well-versed in all these areas and we can advise you with a tailored solution to suit your exact business need. Should your circumstances change, we will re-assess your business goals and risks and work with you to develop updated strategies and solutions. The Prosperity team has a rich network of financial advisers, insurance brokers and commercial lawyers that we work with in collaboration to develop bespoke solutions for our clients.
Want to know more about running a business? Read on here for our guide To succeed as a business owner, make these 7 investments. We also discuss our Top 10 tips for growth of a business.
Different strategies benefit individuals differently depending on their own circumstances. It is recommended you speak to a financial adviser about your situation if you have any questions. For more information, please contact one of our Directors of Financial Services, Gary Dean at gdean@prosperity.com.au or Hamish Landreth at hlandreth@prosperity.com.au.
