Protecting the Value of Business Ownership

Written by Darryl La’Brooy Financial Planning Specialist Hillross daryl.labrooy@hillross.com.au

In my experience successful businesses are built up overtime, unless you happen to be in the Information Technology field.  In many cases owners have put in a lifetime of effort.  Generally the value of a business is reflected in two ways, one the income it provides the owners and second the sale value of the enterprise at any point in time.  If I speak to any owner both the income and sale value are viewed as extremely important to them and their family who rely on the business they created.

By going to work each day the owner preserves or grows the value they have built up in their business.  Smaller businesses typically under $1million in revenue are very owner dependant. If the owner wasn’t there for an extended period of time the sale value of the business may fall along with its revenue.  Larger businesses rely less on the owner and more on the employees, for its day to day functioning and revenue generation but the longer term direction of these businesses still require strategic input from the owner.

So given the vital role played by a business owner what happens if the owner is no longer there or is out of action for a period of time?  What plans has the owner put in place to cater for such an event?  Cameron Research in Melbourne have undertaken surveys in this area for many years and their findings indicate at best there are gaps in this area and at worst there are simply no plans at all in place for any contingencies.  When we ask families and the spouses/life partners of the business owner what their preference is, the clear answer is the need for a safety net.

So what would happen if the owner could no longer continue in the business and the business was dependant on the owner?  Revenue would fall and with it its value.  With the owner no longer there, is the sale value realisable?  Chances are the sale value of the business will be reduced or may disappear altogether.  If there is no safety net in place successful business owners may have to start drawing on their investments or they may have to sell personal or business assets to get through this period.  Is this something they want to do?  Is there another alternative?  Most businesses who operate out of physical premises and carry stock usually want to protect this value.  The only way they can do this well is via insurance cover.

I would argue the business owner has an even greater value to their business than the premises it operates out of or the stock it carries.  Without the owner in the business the business may not survive for long.  So the biggest asset of the business is the owner.  How is this value protected?  This value is protected in the same way as the physical assets of the business through insurance if there is no viable alternative.  So let’s say a business has a sale value of $2 million and this figure is being relied on by the owner and his or her family.  The family would like this figure guaranteed no matter what.  Therefore in the absence of a viable alternative a $2 million life and disability insurance policy is taken out against the owner of the business.  Should he or she die prematurely before they sell the business or be severely disabled where they are unable to work anymore, a figure of $2 million will be paid out reflecting the value of the business now.  So putting in place this safety net protects a lifetime of effort.  What safety net do you have in place for your business right now?