Addressing Business Risk and ensuring business continuity

The goal of a business is to generate profitable revenue, in harmony with the physical, social and economic environments within which it operates.

Business risk assurance refers to the life assurance products and associated tax effective systems for evaluating the financial security and sustainability of businesses in relation to shareholder agreements, Buy and Sell agreements, Key Person assurance, contingent liability including personal surety by shareholders, loan accounts, future liability and compensation plans.

The objective of our Business risk program is to identify and quantify four crucial risks every businesshas to give attention to, namely:

1. Exposure to third-party creditors (Contingency liability, Personal liability)The risk of being requested to immediately pay an amount not budgeted for.

2. Unrecovered capital (Credit loan account)The risk that the business shareholder will never recover all the input into their business.

3. Unrealised capital (Buy-and-sell insurance)The risk that the business owner could lose their accumulated value and equity in the business

4. Continuity of the business due to the loss of a Key Person.The risk of reduction in revenue, profitability, continuity of credit and business momentum

These risks are classified into 4 categories and prioritised in order of importance and impact to the business and shareholders.

Cost effective solutions are recommended and implemented.

Research has shown that although about a third of these risks are typically addressed, only approximately 15% of businesses have legal documents in place that are current, correctly formatted,signed and aligned with current values.

Questions for which every business owner should know the answer

Do you know and understand your key business risks? Do you know the curveball risks facing your business, and shareholder’s estates? Do you have a contingent liability agreement in place? Do you currently have an updated shareholders agreement and Buy and Sell agreement in place? Have you designed shareholders’ and Key Persons’ exit from your business in life, disability and death?

The Business Risk Program process and deliverables are: Completion of a short questionnaire which makes it simple to understand the four most

prevalent and critical risks in the business environment. A professionally prepared proposal with recommendations to the client that explains these

risks so that they can understand the implications of ignoring the identified risks and how to address same.

The agreements for buy-and-sell and contingency liability, drawn up correctly for the client by professional legal experts.

A detailed explanation of how the applicable tax effective solutions must be structured

Buy and Sell Agreement Overview

If one of the business owners were to become disabled or die, the other owners should be able to afford to buy their business interest, to avoid the liquidation of the business or business assets, or a forced resale of shares to outside parties.

A simple solution is a properly structured Buy and Sell Agreement that guarantees that on the disability or death of a business owner the necessary funds will be available to buy their business interest from the proceeds of the Life Insurance contracts

A Buy and Sell Agreement will ensure a seamless transition of ownership and protect the financial future of the business, while the deceased’s family receives an agreed price for their business interest.

The business remains a going concern. The goodwill of all stakeholders and the credit-worthiness of the business are preserved.

A properly structured Buy and Sell Agreement will provide for fund to assist with a smooth transition of ownership in the business. Buy and Sell Agreements should be reviewed as circumstances change or annually to align with requirements and the current value of the business.

Key Person Assurance

Key Person assurance is life assurance effected by an employer on the life of an employee (the key person) whose services and know-how are instrumental in contributing to the profits and sustainability of the business. The life policy is owned and paid for by the employer and when the keyperson dies or is disabled the proceeds are payable to the employer for its benefit. In the same way as insurance can compensate an employer for loss suffered by fire, theft or water damage (the damaged or stolen asset can be replaced), life assurance proceeds can compensate the employer for the loss of a key person in that it keeps the employer's business operating by:

covering losses during the readjustment period;

paying the additional expenses of finding, employing and training a new employee; and

ensuring continuity of credit and helping to maintain the profitability of the business.

Contingent Liability

External funding, be it in the form of an overdraft, a term loan or asset finance, is a normal part of business and its capital structure. Owners of the business may be required to sign surety for the funding obtained from financial institutions and other sources. This poses the problem that the estate of the deceased owner may be called upon to settle the debt as a guarantor.

The simple solution is contingent liability assurance. The life policy is owned and paid for by the employer and when the key person dies or is disabled the proceeds are payable to

the employer for its benefit.

This contingent liability business assurance solution ensures that the owners of the business are protected against the creditors so that the creditors do not exercise the sureties against the estate of the deceased or permanently disabled owners. This is achieved by releasing the sureties in the event of death and can also be extended to include disability as mentioned above.

Loan Accounts

Loan account assurance covers the life of the owner of the business in the event of death or disabilityto pay an amount of capital that will after income tax, estate duty in the event of death, and capital gains tax, be equal to the loan account so that the business can pay the capital and thus protect the capital structure of the business

Two methods can be utilised. The first method would be to include the loan account capital requirement in a Buy and Sell agreement or Key Person assurance as part of the owner’s interest andclaims. The second method is for the business to ensure the life of the owner for an amount equal to the outstanding loan account plus taxation as discussed above

The main objective to taking out loan account assurance is to ensure that a business that has borrowed funds from an owner will be able to in the event of the death or disability of the owner, be able to either repay the funds to the estate of the owner.

Future Liability Assurance

The future liability plan is the pre-funding for future expenses by way of contributions to a pureendowment.Future expenses include, inter alia:

- Replacement of assets- These assets depreciate and reduce in value due to wear and tear, and such

depreciation can be claimed as a tax deduction by virtue of section 11(e) of the IncomeTax Act. It is this tax saving, by way of the deduction that can be used as a contributiontowards an endowment to pre-fund for the replacement of such assets

- Repayment of future financial obligations such as:- Shareholders’ credit loan accounts- The redemption of redeemable preference shares- Payment of restraint of trade agreements.