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 disability?

❓ How long will it take to find a replacement?

  • Is a suitable person:

    • Within the business?
    • or -Available in NZ?
    • maybe -Have to be attracted from overseas>
    • plus -How much will they have to be paid to encourage them to change?

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

    • For instance, it can take anything up to 12 months to find, attract, secure, and train a new key person to full effectiveness.

❓ In addition, 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:-

    • First – Management
    • Second – Sales/Relationships
    • Third – 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
    • Four – How can the loss to the business be quantified?

❓ What if a business owner is also a Key Person ?

  • How will the loss affect:-

    • The shareholding of the company?
    • Also, how about Shareholder loans?
    • Or Shareholder current account balances; either debit or credit? These are loans which are repayable on demand – plus interest. If these exist, someone will be looking for loans to be repaid in the event of a loss of a key person.

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

    • For example, can the contract still be completed within the terms?
    • Also, 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 – therefore  a financier is able to attack all or any of the guarantors for repayment, either full or partial.
    • For instance, this may include private life insurance proceeds or even the family home, thus endangering the future financial security of a family. (And not necessarily the family of the affected shareholder; it could be any of the guarantors’ family.)
    • Another risk -Personal Guarantees survive a death and are a prior charge on the estate of the guarantor, thus putting personal and estate assets at risk. .
    • In addition, 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. For instance, this can take months, or in an extreme case, a year or more.

 📞CALL TO ACTION📞

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