Imagine that your business partner dies tomorrow. Do you know exactly what will happen to their share of the business? Will their spouse take over their share, and how will this work for you? Do they understand the business and will you be able to work with them as the new co-owner?
The reality of this situation is more common than many business owners would like to think, and is just one amongst a myriad of critical reasons why business owners should take the time to do financial planning.
Jannie Rossouw, head of Sanlam’s Business Market, says many business owners fail to see the importance of financial planning in their businesses because they simply don’t dwell on what they don’t know.
“A business owner typically focuses on the nitty gritty of the business, because this is where his interest and his passion lies. Yet, taking a simple step back may help him realise the need to take care of his personal finances beyond the day-to-day running of business. Failure to do so will not only impact his own personal finances, but can determine the continuity of his business and the value proposition which he presents to his employees.
“In practical terms, a business that doesn’t have a clear plan of how it will operate should one of the key partners die or become disabled, faces immense risk. This kind of scenario can spell the end of the road for a business and can destroy the value which the partners have created over many years.
Moreover, when a business owner dies without a will or with a will that isn’t up to date, it can cause immense trauma to his family if his will cannot be properly executed.
Rossouw says the reasons why financial planning fall by the wayside can include anything from pure ignorance and failing to understand the implications of poor planning to avoidance because of the potential complexity involved.
The answer, he says, lies in getting the basics in place and appointing a qualified financial planner. In practical terms it means paying attention to the drafting of a will and an estate plan, getting sufficient life cover to enable the execution of the will as well as providing for dependants, healthcare and retirement planning in place. Thereafter business basics like short-term insurance, buy-and-sell agreements, key person insurance and basic employee benefits should follow.
“Critically, once this is in place, a business owner should institute a regular audit of his personal and business financial planning elements to ensure that plans remain relevant and up to date. It doesn’t help to implement a once-off financial plan without regular reviews and without the peace of mind that buy and sell agreements continue to reflect the business value. Similarly, imagine the consequences of a lack of review of sureties so that these are not cancelled when no longer needed!”
Rossouw, however, adds that a business owner’s financial needs extend beyond providing for his family when he is no longer around.
“A business owner who invests blood, sweat and tears into his business yet fails to consider the value of employees is likely to lose valuable people to competitors who may offer them more competing packages. So apart from covering the risk of losing key employees to illness and injury, also consider investing in their future by catering for their retirement planning and other general financial planning needs.”
Rossouw says failing to do so may well result in employees becoming dependent on the business owner and possibly unable to retire or to obtain appropriate medical care when it’s needed.
