Wealth Builders

PLAN YOUR BUSINESS EXIT

Key Person Protection Planning

People and revenue are the lifeblood of every business and the two are inextricably linked; i.e. revenue depends on people and people depend on revenue.

If a business is to be able to continue trading following the sudden unexpected loss of personnel to a serious life risk (i.e. disablement, trauma or death), it must remain solvent and able to continue meeting its financial obligations as well as maintain shareholder value.

In order to achieve these objectives, it is vital that those personnel central to the business’s continued viability are identified before the fact and the downstream effect of their loss understood and planned for.

The business should have a Business Continuity Plan that ensures that business revenue can be preserved, lost personnel replaced, debts and personal guarantees extinguished (particularly  so if  required by creditors and lenders) and all other contingencies provided for.  These factors are all too often underestimated or overlooked.

Please note: You have a fiduciary responsibility to your shareholders and their families and creditors to immediately address any identified issues for which funding facilities are not presently available. The first and possibly most important issue to address in maintaining your company’s solvency and ability to continue trading, is to ascertain the level of revenue that is at risk and to have a strategy in place to preserve that revenue.  In ascertaining this, it must be established who is responsible for the three main tasks of:-

  • sales and business relationships,
  • management and
  • specialist functions.

All business enterprises, whether small, medium or large depending upon specific personnel who are central to their continued viability and success.  These are commonly referred to as Key People.

It is common sense to protect business proprietors and their families against the loss of these key people.  However, there is also a legal duty upon Company Directors and Trading Trustees that their business remains solvent and able to meet its financial obligations under all circumstances.  This would include the unexpected loss of a proprietor or employee who is a key person.

What happens when a Key Person dies, becomes disabled, or suffers a major health trauma?

If the death, disability, or major health trauma of a key person results in a reduction of business revenue, profit or value, the business owners may be faced with one or more of these alternatives.

OPTION 1 – RECRUIT A QUALIFIED REPLACEMENT – QUICKLY.

🛑 The problems here include:

 ❓ Is this a temporary or a permanent problem?

❓ How long will it take to find a replacement?

❓ Is a suitable person:

❓ Within the business?

❓ Available in NZ?

❓ Have to be attracted from overseas>

❓ How much will they have to be paid to encourage them to change?

❓ How long will it take the replacement to become fully effective?

💡 It can take anything up to 12 months to find, attract, secure, and train a new key person to full effectiveness..

❓ Will the business still lose revenue/profit/value in the interim?

❓ How much of the income or profit is the key person responsible for in the areas of:-

      • Management
      • Sales/Relationships
      • Specialist tasks?
      • 💡 * Specialist Tasks are those that require highly specialised skills in their performance such as in the areas of manufacturing, design, advisory and service, from which revenue is derived and which skills are difficult to replaceHow can the loss to the business be quantified?

❓ What if the key person is also a business owner?

❓ How will the loss affect

      • The shareholding?
      • Shareholder loans?
      • Shareholder current account balance?

❓ What if the business has contracts that incur non-performance penalties?

❓ Can the contract still be completed within the terms?

❓ Is there a reserve fund to cope with possible penalties?

 ❓ What if the key person has given a personal guarantee to support a business loan?

💡 If a financier perceives that the loss of a key person reduces the viability of the business, they are likely to demand partial or full repayment of the debt.

💡 Most personal guarantees to support a business debt are joint and several – a financier will attack all or any of the guarantors for repayment, either full or partial.

💡 Personal guarantees survive a death and are a prior charge on the estate of the guarantor.

💡 The estate of a deceased guarantor cannot be probated until the terms of the guarantee have been dealt with to the satisfaction of the financier and the guarantee extinguished. This can take months, or in an extreme case, a year or more.

OPTION 2 – TRAIN AN EXISTING EMPLOYEE TO DO THE JOB – QUICKLY

 🛑 The problems here are:

 ❓  Is there a suitable on staff replacement available?

❓ How long will it take to train the replacement?

❓ How long will it take the replacement to become fully effective?

💡 It can take anything up to 12 months to train a new key person to full effectiveness..

❓ Will the business still lose revenue/profit/value in the interim?

❓ How much of the income or profit is the key person responsible for in the areas of

      • Management
      • Sales/Relationships
      • Specialist tasks?
      • 💡 * Specialist Tasks are those that require highly specialised skills in their performance such as in the areas of manufacturing, design, advisory and service, from which revenue is derived and which skills are difficult to replace❓ How can the loss to the business be quantified?

❓ What if the key person is also a business owner?

❓ How will the loss affect

      • The shareholding?
      • Shareholder loans?
      • Shareholder current account balance?

❓ What if the business has contracts that incur non-performance penalties?

❓ Can the contract still be completed within the terms?

❓ Is there a reserve fund to cope with possible penalties?

 ❓ What if the key person has given a personal guarantee to support a business loan?

💡 If a financier perceives that the loss of a key person reduces the viability of the business, they are likely to demand partial or full repayment of the debt.

💡 Most personal guarantees to support a business debt are joint and several – a financier will attack all or any of the guarantors for repayment, either full or partial.

💡 Personal guarantees survive a death and are a prior charge on the estate of the guarantor.

💡 The estate of a deceased guarantor cannot be probated until the terms of the guarantee have been dealt with to the satisfaction of the financier and the guarantee extinguished. This can take months, or in an extreme case, a year or more.

OPTION 3 – CONTRACT WORK OUT TO A QUALIFIED COMPETITOR

🛑 This will not be a practical option unless:

 📌 There is a suitably qualified competitor.

📌 They can guarantee completion on time.

📌 They will keep information confidential.

 📌There is no danger of losing intellectual property.

🛑 Additionally there are still problems if:

📌The key person is a business owner and loan guarantor.

❓ What if the key person has given a personal guarantee to support a business loan?

💡 If a financier perceives that the loss of a key person reduces the viability of the business, they are likely to demand partial or full repayment of the debt.

💡 Most personal guarantees to support a business debt are joint and several – a financier will attack all or any of the guarantors for repayment, either full or partial.

💡 Personal guarantees survive a death and are a prior charge on the estate of the guarantor.

💡 The estate of a deceased guarantor cannot be probated until the terms of the guarantee have been dealt with to the satisfaction of the financier and the guarantee extinguished. This can take months, or in an extreme case, a year or more.

📌 The business incurs contract performance penalties.

❓ Can the contract still be completed within the terms? .

❓ Is there a reserve fund to cope with possible penalties?

📌 The business loses value in the interim.

❓ How much of the income or profit is the key person responsible for in the areas of

      • Management
      • Sales/Relationships
      • Specialist tasks

💡  Specialist Tasks are those that require highly specialised skills in their performance such as in the areas of manufacturing, design, advisory and service, from which revenue is derived and which skills are difficult to replace

❓ How can the loss to the business be quantified?

📌 The competitor uses information gained while “doing your contract work” against the business at a later date;

OPTION 4 –  BORROW TO FUND A REDUCTION IN CASH-FLOW – QUICKLY

 🛑 The problems here are:

 ❓ Will the business be able to service an additional loan at this time?

❓ Will a lender be willing to make further loans at this time?

❓ Does the business already have existing loans?

❓  Does the business or its owners have additional security to give to the lenders.

🛑 Additionally there are still problems if:

📌The key person is a business owner and loan guarantor.

❓ What if the key person has given a personal guarantee to support a business loan?

💡 If a financier perceives that the loss of a key person reduces the viability of the business, they are likely to demand partial or full repayment of the debt.

💡 Most personal guarantees to support a business debt are joint and several – a financier will attack all or any of the guarantors for repayment, either full or partial.

💡  Personal guarantees survive a death and are a prior charge on the estate of the guarantor.

💡 The estate of a deceased guarantor cannot be probated until the terms of the guarantee have been dealt with to the satisfaction of the financier and the guarantee extinguished. This can take months, or in an extreme case, a year or more.

📌 The business incurs contract performance penalties.

❓  Can the contract still be completed within the terms? .

❓  Is there a reserve fund to cope with possible penalties?

📌 The business loses value in the interim.

❓ How much of the income or profit is the key person responsible for in the areas of

    • Management
    • Sales/Relationships
    • Specialist tasks

💡  Specialist Tasks are those that require highly specialised skills in their performance such as in the areas of manufacturing, design, advisory and service, from which revenue is derived and which skills are difficult to replace

❓ How can the loss to the business be quantified?

OPTION 5 –  SELL ASSETS TO FUND A REDUCTION IN CASH-FLOW

 🛑 The problems here are:

 ❓ Does the business have surplus assets that can be easily sold?

💡 Assets may not realise full value.

💡 How long will it take?

💡 Will the business’ lenders provide support

🛑 Additionally there are still problems if:

📌The key person is a business owner and loan guarantor.

💡 If a financier perceives that the loss of a key person reduces the viability of the business, they are likely to demand partial or full repayment of the debt.

💡 Most personal guarantees to support a business debt are joint and several – a financier will attack all or any of the guarantors for repayment, either full or partial.

💡  Personal guarantees survive a death and are a prior charge on the estate of the guarantor.

💡 The estate of a deceased guarantor cannot be probated until the terms of the guarantee have been dealt with to the satisfaction of the financier and the guarantee extinguished. This can take months, or in an extreme case, a year or more.

📌 The business incurs contract performance penalties.

❓  Can the contract still be completed within the terms? .

❓  Is there a reserve fund to cope with possible penalties?

📌 The business loses value in the interim.

❓ How much of the income or profit is the key person responsible for in the areas of

    • Management
    • Sales/Relationships
    • Specialist tasks

💡  Specialist Tasks are those that require highly specialised skills in their performance such as in the areas of manufacturing, design, advisory and service, from which revenue is derived and which skills are difficult to replace

❓ How can the loss to the business be quantified?

Do you want answers to these and other important questions”

Learn more about the dangers and problems associated with each of these options and how you can provide a managed key person protection plan and book a meeting time using my online calendar here

FREE KEY PERSON INSURANCE GUIDE – DOWNLOAD

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A key person protection plan to inject money into your company is the only effective solution.

A financial MRI Scan is a ten point guide to financial security and peace of mind – at my cost! This guide is yours to keep.

To learn more about how a Business Financial MRI Scan will identify, analyse and, quantify the major financial risks in your business and recommend ways to minimise or mitigate those risks, please click HERE Business Financial MRI Scan