Preparing For The Inevitable

It is a question that many business owners avoid: what would happen to the company if one day they were not there to run it any longer. It is an uncomfortable issue to ponder, but one that is essential to the survivability of any business.

The departure of a key person in a business can lead to a whole range of problems: creditors and suppliers may lose confidence in the company's ability to pay the bills, while customers and employees may also worry about its future.

When the owner of restaurant chain Swatow Group passed away in 1992, Changi Airport Group immediately terminated the lease on the group's outlet there, as it had been the owner who had signed the lease. Suppliers then turned up at the company's headquarters to demand payment.

His wife, a full-time homemaker, was unable to run the business and this resulted in the chain eventually shutting down all its 18 outlets across Singapore within a few weeks of her husband's passing.

"The continuation of the business is threatened when the key decision maker is not around. The supplier may not give you creditors, and the customer may be wary of your ability to fulfill your orders. Staff can also question whether they will get paid," said Stephen Chew of Summit Planners, an experienced consultant who advises business owners in the areas of wealth preservation, business succession planning and corporate risk management.

One way to deal with this risk is to ensure that the company has plenty of cash in the bank to deal with any eventuality. To do that, companies are turning to a product known as Universal Life Insurance (ULI).

ULI is able to provide a business with funds when it faces a major disruption due to the premature departure of a key person - such as an owner, a shareholder or senior executive. The funds can be used to buy out the shares of a deceased shareholder at a price that is fair to their family, or to satisfy the inheritance of heirs without having to sell the business if the founder of a company passes away. Having life insurance for business can help ensure that these financial obligations are met smoothly during such difficult times.

Having such "keyman protection" is even more critical for SMEs, as studies have shown that the large majority of them have no proper succession planning in place. "An employee leaving you or a person dying, this is something that is sure to happen. As such, keyman protection is a must for every business," said Mr Chew.

ULI can also be used a form of bonus to help retain top talent or as a way to diversify an investment portfolio as returns from commercial insurance tend to have a low co-relation to other asset classes.

The key benefits of ULI following the departure of a key person is summarised below:

• Support business continuity and succession planning
• Promote talent retention
• Preserve cash flow through the repayment of debt
• Protect financial assets through diversification

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