Every business owner has the same basic risks that, if un-addressed, could prove catastrophic to your income, your business, and your family. Yet, for whatever reason (and it's typically procrastination, not the expense) many of us don't actually do anything about insuring for or mitigating these risks. This post is all about ensuring that you have the basics covered. Trust me, if you do these you will sleep much better at night and can focus on the worries of sales and cash flow, not the worries of catastrophe.
What are the basic risks you should consider as a business owner and the associated mitigation techniques?
- What happens if I die?
- What happens if I become disabled?
- What happens if the business has a disaster (e.g. fire, technology outage)?
- What happens if someone steals from me?
- What happens if a key employee dies?
- What happens if I lose a key client or employee?
What happens if I die?
Assuming no major health issues this is easy and cheap to insure via a term policy. You can get sexier with whole policies or hybrid policies but at the most basic level, term insurance is a great solution. If you do have health issues, consider whether or not these issues are genetic or avoidable via habit and lifestyle changes (losing weight or stopping smoking will probably give some other benefits too). Be sure to get at least enough insurance to satisfy your debts; definitely get extra if you want to provide for your surviving heirs.
Assuming you have the insurance policy ensure that you have an updated shareholder / partnership / buy-sell agreement so that interested parties (e.g. your partner, your beneficiaries) actually know what's supposed to happen with the life insurance proceeds. In other words, what if you die, you have life insurance that is supposed to fund your partner buying you out, and subsequently your partner does not elect to buy your spouse out of your interest because the buy-sell agreement didn't specify that this is what the proceeds were supposed to be used for. Not good!
You also need to ensure that you have updated wills and trusts that deal with ownership of your company. This is especially important if you are in a business that requires a professional license. For example, as a CPA if I die my wife CANNOT own my business, since in North Carolina, if your name is in the firm name you have to be both a CPA and active in the business. If you are an owner (but no name in the business) you have to be active in the business. Passive activity isn't really an option.
What happens if I become disabled?
As with life insurance, this is insurable. However, you do need to demonstrate enough income to support this disability coverage amounts. Disability will cover potential lost income while you are recovering. What you do need to consider is getting disability coverage that provides for the purchase of your business (similar to life insurance) should you not be able to act in the capacity of business owner assuming you are actively managing your business. Similar to life insurance, ensure that this is spelled out in a buy-sell agreement.
What happens if the business has a disaster?
First, have a plan (e.g. where should people work) that is based on risk of loss (e.g. what if we lost all our accounting records) and how quickly you need to be up and running again. Secondly, you can insure for things like lost revenue due to a fire, etc. Periodically re-evaluate insurance coverage limits to ensure they are commensurate to your current revenue and expense structure.
What happens if someone steals from me?
If you have an employee or an outsourced provider that handles cash they need to be bonded. Period. You are an idiot if you don't.
What happens if a key employee dies?
First, cross train so that you can at least pick up the pieces (assuming this is doable and feasible). Second, you are allowed to own a life insurance policy on someone else if you have their approval. Consider it. Lastly, if this person is in your buy-sell agreement (e.g. they are going to buy you out if you die) – update your agreements!
What happens if I lose a key client or employee?
This is tougher to insure. There are programs in place like captive insurance pools but they are expensive to maintain and require the use of specialists to estimate the insurance premium and risk of loss. Generally you probably need to be in the millions of dollars of harm before they make economic sense. Rather, think through what you need to do to mitigate (what costs would you cut, how will you maintain customer loyalty, etc.). On the employee side ensure you have legally enforceable non-compete agreements. Check with your respective state case law to understand what's enforceable and what isn't in these types of agreements.
