KEY PERSON LIFE INSURANCE - A common small business partnership asset is the skill each partner brings to the partnership. One partner may have a technical skill like program design, or a specific trade, or a professional designation. The other may have a law degree or a CA designation, or a marketing skill set. What ever it is, it is almost certain that one or both partners have a dual role in the business, one being their unique skill set and the other is co-managing the company. That is why you see small business entrepreneurs working long hours, often without holidays. This is quite typical and normal in small businesses. Usually, a partners "running the business" duties is getting business in the front door, smoozing with customers, clients etc. Another significant "running the business" duties are managing the production of your product or service and "firefighting"trouple spots.
What is not always realized, or more specifically internalized is, that in fact the partners are fulfilling a duality of roles. So what happens to the two jobs that a partner is doing if that partner is gone for an extended period through illness, accident or death. It is assumed out of hand that the "running of the business" functions may be obsorbed by the healthy partner, which may become a full time job, in of itself. The technical skill sets of the absent partner and the overworked active partner are either left undone, (not practical) or distributed among other employees with the similar skill sets; (not likely otherwise it may already have been done). The most logical and viable, yet often overlooked solutions is, to "rent" the needed skill sets through the use of "key person" insurance, insuring against premature and unexpected death through life insurance, or a catastrophic health issue, through critical illness protection or lastly Long term disability via LTD insurance.
All businesses focus on material asset management. Businesses contantly strive for price stability of materials and a guaranteed availablity of supply so to manage product pricing, profit, and growth forcasting. Many small business are not so forward thinking when it comes to human skill assets especially when it comes to the top management. Rationalizations and over confidence in ones capasity seem to trump common sense and the practical application of the same business practices that are applied to tangible material assets.
As an example, how many times have you heard the rationalization that we will over spend the dollars on a piece of machinery on the rationalization that is has a higher capasity and is a better quality piece of equipment, so it will last longer and be an investment for the future. By contrast, that is rarely applied to human asset logic or "forward" thinking. Larger more established firms have full time "Talent" Managers finding ways to optimize human resource productivity and risk managent techniques to foresee adverse situations that can effect productivity. Most small business cannot afford a full time "what if", person, so what is the solution.
Well here is one. Business partners frequently get together for stategic meetings especially in preparation for annual budgets. Carve out 15 minutes of each of two of those meetings to discuss two questions.
- Question No 1- "What will happen to the business if either or both of partners go down and unable to come to work, for a week, a month, six month or ever?
- Question No 2. "How are we going to mitigate against that, to protect the equity of the business or so the business doesn't implode?
I predict if you do take those two 15 minute meetings, the problem will become so engaging you will see it through. To do a credible job, you will need a facilitator to help you through the process and find and develop the contingency plan that assures the continuity of the business, the business plan and the security of your equity.
One last thought. What ever the nuances of that contingency plan, the most effective funding solution is cash. Period. Full stop. Cash can rent you the skills you just lost. The cheapest form of cash is insurance. The most non-disruptive acquisition source of cash is insurance. The type of insurance, the duration and contingeny are the details, but that's it. Plain and simple. Take 30 seconds and think of any possible contingency that can befall either partner that an instant influction of cash to the business of say $100,000, $500,000 or a million dollars couldn't cushion the impact. Your customer base will think you have been proactive and anticipated contingency. Your credit line banker will breath again, Your employees are anxiousness is eased as they know resources are in place to get help. I rest my case.
Here is a short video from Australia on key person insurance demonstating that this solution is universal to a small business vulnerability all around the world.
If you need to discuss any aspects, feel free to get in touch.