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Will Your Business Collapse?

As a chronic entrepreneur, I am proud to belong to a fierce bunch of people who risk  everything to provide jobs for other people and a quality life for my family. No one ever taught me how to be an entrepreneur, but I have certainly gained the equivalent of a Ph.D.  from many past failures and a few successes.

In my role with Brokers Clearing House I see one consistent theme when I work with my fellow entrepreneurs—they are typically great at building a business but not so great at protecting it. As a result, they are exposed to many risks that could easily be eliminated, but rarely are because the business owner is focusing on operating the business itself.

In any given business, there are generally four areas where the owners are exposed to risk. Many of their advisors try to slow them down enough to acknowledge and address these risks but are told things like, “After the holidays we can talk about it.” Tragedy doesn’t acknowledge the holidays and has no regard for anyone’s convenience. Below is the first topic in a four-part blog that will address four areas of risk exposure often unaddressed by business owners and describe ways you can address these issues.

If you have an employee who is crucial to the success of your business, are you prepared for them never showing up to work again? Many business owners work hard to build a business on their own and then begin to build a team around them. Usually they have one employee whose characteristics and drive make them stand out from the rest. Often these are the kinds of employees who make it possible for the owner to enjoy things like time away from the office or time to golf during the summer without the stress of worrying that the business might fall apart. These employees are the lifeblood of our business. But what if they never showed up again?

Today that scenario will happen to thousands of business owners across America. A key employee is lost because of untimely death or disability or because the employee was lured away by a competitor offering the promise of a brighter future. If one of your current employees is critical to your success, what would you do if they suddenly disappeared from the scene? In the case of a death or disability, do you have the time, money, and resources to hire a top-caliber person who can come in and replace someone who is seemingly irreplaceable? Have you also taken steps to ensure that you have the right incentive in place to make it incredibly difficult, if not impossible, for your key employee to leave?

If you answered “no” to either of these questions, I’d recommend that you speak with an advisor about creative strategies for addressing these issues. Losing a key employee to death or disability is emotionally taxing and stressful enough. When you compound that with the financial stress of finding a qualified replacement so that you can once again have some normalcy in your life, the stress can seem unmanageable.

There are a number of simple, cost-effective strategies available to address this issue. As I write this article, life insurance policies and disability policies are incredibly inexpensive for you to purchase on the lives of your employees. Literally for what you would spend taking an important client out to a nice dinner you can alleviate this risk entirely from your business. Why don’t business owners do it? Probably because they are unaware of this option or don’t understand how cost-effective it can be. Imagine if during the stress of dealing with the loss of a key employee you received a check for $500,000. It won’t remove the emotional pain felt due to the loss, but it can make recovery easier when you have to get back to business. This is possible for pennies on the dollar and should be looked at by any business owner who has an employee or two that would be incredibly difficult to replace. Great strategies also are available for those who would like to ensure that their key employee is less interested in the offers that may come their way through headhunters and competitors. When one of your employees becomes a rock star in your industry, it will not take long for word to get out. Believe me, the members of my leadership team talk frequently about how to recruit talent away from our competitors. Guess which people we can never persuade to talk to us? Those who are vested in some sort of plan involving  significant benefits tied to life insurance.

As a benefit to a key employee, you can purchase a life insurance policy that will provide for their family should the employee pass away. And in the process of doing that, the same policy will build cash value that will act as a potentially large retirement fund for your employee. This is beneficial both to you and to your employee. Unless your competitor is willing to pay a very significant signing bonus on top of a higher salary and bonus, it is very tough to recruit an employee away when they have this kind of “golden handcuff” arrangement in place. Again, if you haven’t looked into a plan like this, talk to a qualified advisor who can help you look at the options. You may want to offer this type of benefit in lieu of a large pay raise, as it provides more benefit to your employee and less exposure to you. Regardless of the cause, the loss of a key employee can have a dramatic effect on the operations, profitability, and in some cases the actual value of your business. Life insurance can provide extremely cost-effective and efficient methods of addressing these needs so that you can get back to focusing on what you do best.  In addition, it shows a future purchaser of your business that you have the right pieces in place to ensure the future value of what they are purchasing. This will have a large impact on your future when you decide to exit the business and enjoy your retirement.

Next week in part two of this blog, I will describe how to ensure that you are prepared for the untimely exit of a business partner.  This scenario happens daily and can have a moderate to insignificant impact on the actual business itself or it can compromise the businesses future entirely.  The steps to insure that the latter occurs are not that complicated. Stayed tuned!