Business assurance

Every business needs business assurance

Ferdi Booysen, Greenlight Product Manager at Old Mutual.

Some business owners feel business assurance is an expense they cannot afford, or see it as a luxury for established businesses. Although it’s true business assurance can be expensive, it’s an expense every business, regardless of the industry, size or length of existence, needs to include in its budget.

Donald Makhafola asks Ferdi Booysens, Greenlight Product Manager at Old Mutual crucial questions regarding business assurance.

How important or necessary is it for a small or start-up business to have business assurance?

Some business owners feel business assurance is an expense they cannot afford, or see it as a luxury for established businesses. However every business needs to include business assurance in its budget.

If you look at small businesses, the pressing concerns are sales, client service and profitability. Since business owners are focusing on these aspects of the business, holistic enterprise risk management often gets left behind, which means that significant risks to their businesses are overlooked.  Some of these risks are related to the death and disability of business partners or key individuals within the business. 

How can we encourage smaller businesses to buy business assurance?

Succession planning and the exit strategy for the business owner will drive the right conversations around business insurance between the owners and their financial advisor. As a starting point, advisers would focus on the individual needs of the business owner through estate planning.  For instance, how will the family be taken care of if they die or are too disabled to work?    

Estate planning however should go hand in hand with the continuity plans of the business, and together they form the foundation for good succession planning.

In the case of a family business, it’s important to identify the successor(s) and their role(s) and responsibilities within the business, where ownership is intended to continue into the next generation.

What type of assurance is suitable for a small business such as a restaurant, bar or tavern in townships?

In the case of a sole proprietor, Business Loan Cover can be used for short to medium term business loans and overdrafts.  If you have key personnel, Key Person Cover would ensure the business can continue should the key person die or become disabled.  Business Overheads Replacement Cover is important for any self-employed person, because if you’re temporarily off work for two or three months, your overheads can be covered with the monthly proceeds from your cover.

Should you as a business owner have business partner(s), a Buy-and-Sell Agreement should be put into place. If one partner dies, the remaining partner(s) will have the option to buy out the deceased partner’s share in the business. This will ensure that the business can continue with business as usual.  

A Buy-and-Sell Agreement must be in place between the partners alongside the Buy-and-Sell Cover, and the agreement regulates the terms of sale on the death or disability of a partner.  Without Buy-and-Sell Cover, the remaining partner will face delays and uncertainty while waiting for the deceased partner’s estate to be wound up.  The remaining partner may also end up with the spouse or children of the deceased as business partners, which may put undue strain on the running and profitability of the business.  

What are the common risks faced by these kinds of businesses in regards to assurance?

Let’s say for example that the business is a partnership. The first risk is that one of the partners dies. There’s also a risk to the family of the partner who dies – especially if the family is reliant on the business owner for their household income.

And here are some of the questions to ask:

  • What impact will it have on the management and income of the business?  
  • Will the bank call in the business loan after one of the owners who signed surety for the loan dies?
  • What will happen to sales or service if one of your key employees are no longer at work?
  • How long will your emergency funds cover your overheads if you are temporarily unable to run the business?

These are the kind of risks that need to be covered with Greenlight for Business (Old Mutual Insurance Product).

 What would be the consequences of not having business assurance?

 It could have huge financial implications for the business. For example: Two business owners both sign surety for a loan. If one of the partners dies and the bank calls up the loan, there will be a huge impact on the personal estate of the deceased, the other business partner, as well as on the business. The remaining business partner will have to come up with the funds to settle the loan and if he can’t, it could lead to the business having to close its doors.

According to your experience, what are the common mistakes business owners make when choosing or buying business assurance and how can that be avoided?

 When it comes to Buy-and-Sell Agreements, the agreement means very little if it’s not structured correctly or updated annually. The Buy-and-Sell Agreement provides funds for the remaining partner to buy out a portion of the business from the deceased in the event of death or disability. Partners need to ensure that their Buy-and-Sell Agreements and company valuations are up to date. 

They’ll also need to ensure that the necessary cover is put in place and reviewed on an annual basis.   This is where a professional financial adviser will play an invaluable role, and at Old Mutual we have specialised financial advice available to business owners through our accredited business assurance advisors and brokers.

 How do you evaluate whether insurance company is reputable or not?

 Business owners should take note of the following:

  •  The capital strength of the insurance company (Are there enough surplus assets to cater for a financial disaster?)
  • The credit rating of the company (For example, Old Mutual is the only AAA rated insurance company).
  • The company’s claims philosophy and statistics – this is where the real benefit of having cover is shown.
  • The sustainability of the premiums - some companies have premium increases year-on-year that may be unsustainable over the longer term.

What are the risks of buying business assurance products?

The business will need to ensure that they consult a professional financial advisor with experience in business assurance.  Your business solutions need to be structured correctly, taking the companies specific structures, needs, and tax considerations into account.  The business must also have sufficient funds to pay their insurance premiums.