The idea of preparing your business in the event of an emergency can quickly fall down the priority list as a business owner.
It may seem preferable to reinvest as much of your money as possible into services that directly support and grow your business.
Realistically, preparing your business to be financially resilient in an emergency is a good use of your time and resources. This is because it can help provide continuity for customers and employees alike, no matter what happens.
So, here are five practical steps you can take that can secure and prepare your business before disaster strikes.
1. Build an emergency fund – and make sure it’s accessible
First things first, it’s important to have accessible cash to fall back on when you need it.
As mentioned, it’s tempting to reinvest all your profits straight into the business so you can continue growing it. But there’ll be nothing to grow if you’re forced to stop operating because machinery breaks down or sales are too low, and you can’t afford to pay your staff.
That’s why it can be sensible to set aside a pot of cash in an easy-access savings account that you can dip into if you ever need to.
Aim to have at least three to six months’ expenses in the account so that the business can remain buoyant even in the worst-case scenario.
You may want to spread this money between different banks and institutions, too. The Financial Services Compensation Scheme (FSCS) will protect up to £85,000 of your money with each provider should that institution fail.
So, if you have more than this amount, consider holding it with various different providers.
2. Create a plan for what happens if you’re unable to work
Next, you should think about what will happen to the business if you’re unable to work for a prolonged period.
As the business owner, you’re likely central to everything your company does. That means that losing you, even for just a few weeks, could be terminal for the business.
Indeed, if a temporary illness or disability then turns into a permanent one, this could present some serious headaches to both you and the business.
To protect the business, you could:
– Select someone who will step into a leadership role for you
– Have cover in place, such as key person insurance, to protect the business in the event that you become terminally ill or pass away
– Take out shareholder protection, ensuring that it’s possible for your partners or directors to buy your stake in the business if you become terminally ill or die.
You may well be irreplaceable to your business functions. So, make sure that there’s a framework that will help to keep things going should something happen to you.
3. Know what happens if you or a key member of your team dies
No one wants to think about a close team member or even themselves dying. But as upsetting as it may be, it’s practical to make arrangements for such an eventuality.
Again, having key person insurance or shareholder protection can be a sensible precaution, as it will provide financial support at a difficult time.
Shareholder protection, in particular, can be vital as you may end up becoming “forced partners” with a director’s spouse, if a business partner dies and leaves their stake to their significant other.
By having shareholder protection, you can ensure that you have the means to buy that stake, meaning you can retain control of the business at a tumultuous and potentially dangerous time.
You may also want to consider putting relevant life cover in place for key personnel. This may not directly help the business, but life cover is an attractive bonus for employees and might encourage your most valued members to stick with you throughout your tenure.
Relevant life cover is typically a tax-deductible expense. So, as well as protecting your business, it can also help to reduce your tax bill.
4. Plan for a time when you require long-term care
Your business is your livelihood, and no doubt plays an integral part in your overall financial planning. But have you considered how you might use the value in your business to fund long-term care (LTC) if you were to need it?
You certainly don’t want to be in a position where you’re forced to liquidate business assets and sell them to provide the money you’ll need to fund your LTC.
So, consider setting funds aside in the business that are for this specific purpose, just as you have for your emergency fund. That way, if you do ever require LTC, the business will be able to support you and continue uninterrupted.
5. Secure the legacy of your business
Above all else, you should look at ways to secure the legacy of your business sooner rather than later. Otherwise, an emergency event may suddenly take this opportunity away from you.
Becoming ill, incapacitated, or dying without having made these decisions would mean that you don’t have a say in the future direction of the business.
Your legacy can be whatever you want it to be. Whether you want to pass on the family business to your children to continue running, or sell it and provide a lump sum for the next generation, the future of your company is exactly that: yours.
Some considerations you might want to make could include:
– Formally selecting a successor, whether that be your child, a trusted employee, or a third party
– Using trusts, gifts, and other similar structures to reduce how much tax is owed when you move on or sell the business
– Deciding whether to continue in an advisory capacity, or to fully divest yourself from any responsibility.
There’s no right or wrong answer to securing the legacy of your business, as it’s entirely down to your preferences.
But make sure you do so before you lose the chance.
Speak to us
If you’d like to find out even more about protecting your business before an emergency strikes, please do get in touch with us at Cordiner Wealth.
Email email@example.com or call 0113 262 1242 to find out how we can help you prepare for a rainy day.
Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.