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Running a business is not for the faint-hearted. Risks abound and when it comes to insuring against them, small business owners need a financial adviser in their corner who knows how to protect them against threats they didn’t even know were there.

Small, medium and micro enterprises (SMMEs) have been called the backbone of the South African economy – and with good reason. In a country plagued by unemployment, SMMEs are essential for economic growth and stability. They’re also subject to risk.

“According to data from the UN, micro, small, and medium enterprises account for over two million companies in South Africa and represent more than 98% of formal business,” says Jacques Pienaar, Commercial Underwriting Partner at King Price Insurance. “The Brenthurst Foundation reports that these enterprises are responsible for employing 50-60% of our labour force and contribute 34% towards GDP. And yet, South Africa has a higher failure rate of SMMEs than elsewhere in the world, with about 70-80% of our small businesses failing within five years.”

Keeping small business in business

The Covid-19 pandemic was a sobering lesson in how many small businesses operate at the edge of survival where one unforeseen event could be the difference between success and closure.

“Business owners face diverse insurance needs in the ever-changing entrepreneurial landscape,” says Ricardo Coetzee, Head of Auto & General. “Whether managing a startup, family-owned business, or professional practice, protecting against unforeseen challenges is crucial. Small and medium-sized enterprises (SMEs) are particularly vulnerable to risks like property damage, liability claims, theft, and legal disputes.

“Insurance provides crucial financial support during unexpected events, preventing a single incident from derailing operations and safeguarding against business interruption. It is essential for SMEs to assess their unique risks and consult with their financial adviser to tailor a comprehensive insurance portfolio that adequately addresses their specific needs.”

An adviser can make a meaningful contribution by helping small business owners identify the different types of risk their business may be facing and putting the necessary cover in place. “Financial advisers play a critical role in helping these small medium and micro enterprise (SMME) owners and entrepreneurs protect their income, so that they can cover their personal expenses and keep their doors open for business when illness, injury or disability prevents them from working,” says Melody Cloete, Bidvest Life Training Specialist.

However, small business insurance is anything but straightforward, and there’s a good chance the client won’t know what their problem is, let alone what they need to fix it.

Uncovering the client’s needs

To ensure that SMME and entrepreneurial clients have the right cover in place to protect their income, advisers can start with a few key questions:

1/ What is the client’s occupation? “Different occupations have different risk profiles and, as such, may have different underwriting criteria, benefits, and waiting periods,” says Cloete. “An entrepreneurial venture may fall into the agricultural sphere, for instance, and it is important to determine whether this entrepreneur’s income should be insured as a business owner or farmer.”

2/ What revenue streams do they have? “Entrepreneurs may have many small businesses on the go, or often perform multiple functions within one business. The risk related to, and the income derived from, each function or activity must be assessed and insured separately,” says Cloete.

3/ What are their financial needs? “Doing a thorough financial needs analysis will pinpoint the sources of your clients’ income, and the impact on their lifestyle if they are unable to work due to illness, injury or disability,” Cloete notes. “This is especially important if your client doesn’t earn a fixed monthly salary. It is also crucial to factor in the additional costs that come with a chronic illness or a temporary or permanent disability. If a client is diagnosed with a critical illness, for example, it’s vital that they have sufficient cover to ensure they can focus on their recovery without worrying about the associated costs.”

4/ Do they have cover in their personal capacity as well as for the business? “Small business owners need income protection for their personal expenses that would normally be paid for out of their salary – like their other insurance, medical aid, household expenses, and school fees,” says Cloete. “However, they also need to ensure business continuity while they are unable to work. A business overhead expense benefit triggered by the same diagnosis as personal income protection, will ensure that company overheads, running costs, employees’ salaries, supplier invoices and the like can be paid while the owner is ill.”

5/ What is the waiting period? “It’s important to protect your entrepreneurial clients’ income with the shortest waiting period possible,” Cloete urges.

6/ Which risks will have the biggest and most immediate impact on the business? “For example, if a risk occurs and you are unprotected, do you go out of business? If a risk occurs and you are unprotected, will it have a significant impact on your financial position for the next twelve months?” says Danie van Niekerk, Executive Director of Indwe Financial Services. “And then you can deal with other risks which will have an impact on the business, but possibly less than a six month or three-month impact.”

Peter Olyott, CEO of Indwe Financial Services, adds: “Obviously these risk outcomes will vary as a business grows and progresses, but the reason why it is so crucial is for the business owner to know and understand where the limited insurance spend needs to go. The main outcome of such an exercise is for a client to know and understand the risks the business is exposed to, what the potential costs of treating the risks are and which risks pose such a risk that one needs to contract out of these.”

Set up for success 

It’s not only the nature of the business that affects the insurance needs of a business, but also the set-up of the business that plays a role. Since the pandemic, working from home and hybrid set-ups have become more commonplace and this affects a business’s insurance. “If your clients or their staff members have equipment at home that’s owned by the company, and which is used to do business on the company’s behalf, then it’s up to the company to insure that equipment,” says Pienaar. “In the case of a business that’s entirely run at a client’s home, the equipment and stock should be covered under a business insurance policy, and not included in a personal insurance policy.”

In the event that the business operates from an office, it’s important to consider the contents of the office, the building itself and also, importantly, the impact that losing one or both of these would have on the business. “Small business owners should insure their physical buildings as well as their electronic and office equipment against fire, theft, accidental damage and breakdown, and losses due to business interruption,” notes Pienaar.

Similar concerns apply to businesses that own company vehicles. “Commercial motor insurance protects company-owned cars, vans, and trucks in the event of accidents and theft,” says Pienaar. However, it’s not only company-owned vehicles that need to be considered. “If your clients’ employees use their own cars for business purposes, then these vehicles need to be covered for business use as personal insurance won’t necessarily cover them if an incident occurs while they’re on the clock. And, if a business transports materials or products, then goods in transit cover is essential.”

If the business is in a busy precinct, such as a CBD, shopping district, or along a popular protest route, insurance against looting and civil unrest can be very beneficial, as seen during the riots in KZN in 2021. “Sasria is the only short-term insurer that provides cover against extraordinary risks such as civil commotion, public disorder, strikes, riots, and terrorism, which are not covered by ordinary insurers,” says Pienaar. “Sasria cover can usually be bought through an insurer as part of a business insurance policy, but it can also be procured directly from Sasria.”

Planning for the future

Small businesses often arise out of a process of evolution. Sometimes it’s a family business that’s passed down through generations. Other times, it’s a specialist who decides they’ll be better off working for themselves. And sometimes it’s a couple of friends or associates who spot a gap in the market and decide to fill it. What all of these scenarios have in common is that the people who end up owning and running the business are often not “business people”. Their focus is on the product or service they provide and the day-to-day operations of providing it. They may have considered insuring against their ability to provide their product or service, but often they haven’t given much thought to the future of the business itself.

“Financial planning around what happens to the business if something serious should happen to the business owner is imperative,” says Olyott. “Does the business just fall to pieces? Is there some risk management which should be applied in terms of succession planning or to identify what the process would be to either continue the business or to change it?”

When having discussions with business owner clients around the future of the business, there are some important areas to consider.

1/ Key person insurance

“In many SMMEs, the success and continuity of the business depend heavily on the skills, knowledge, and contributions of key individuals, such as the owner, founder, or key employees,” says Barnard. “Key person insurance (also known as key man insurance) is designed to provide financial protection to the business in case of the death or disability of these essential individuals. Key person insurance policies are typically owned by the business, and the business is the beneficiary. In the event of the key person’s death or disability, the policy provides a cash pay-out that can be used to cover the financial losses incurred due to the absence of the key person. These losses may include the cost of hiring and training a replacement, compensating for lost business opportunities, and servicing debt obligations.”

The adviser’s role may go well beyond getting the cover in place. They may also need to help their client identify who in the business would qualify as a key person and quantify the financial impact their absence would have on the business, notes Barnard.

“Identifying and insuring business owners and key individuals within the business is crucial to mitigating the financial impact of losing a key player due to death or disability and to insure sufficient income protection in the mentioned events,” adds Van Niekerk.

2/ Liability insurance

“Businesses need protection against legal claims and liabilities, including public liability, professional indemnity, and product liability insurance,” says Van Niekerk. This is something that’s top of mind for larger companies, but which small business owner may overlook – until they’re faced with a situation they’re unsure how to handle.

Contingent liability insurance is also important. “SMMEs often face various contingent liabilities, which are potential financial obligations that may arise in the future due to unforeseen events,” says Barnard. “Most notable of these is the responsibility to sign over personal surety to long-term business debt. Contingent Liability Insurance provides coverage to ensure that if the business owner passes away or becomes disabled and is therefore no longer able to service this debt, that this does not need to be funded by their estate, meant to support their family and other dependents. Advisers can assist SMME owners by conducting a thorough risk assessment to determine the appropriate level of coverage based on the outstanding balances of the debts that business owners stand surety for and tailor the policy to evolve as the debts in the business evolve over time. They can also help clients understand the policy exclusions and limitations to ensure adequate protection.”

3/ Employee benefits

“Providing comprehensive benefits to employees is essential for attracting and retaining talent,” says Van Niekerk. “This includes health insurance, life insurance, and retirement plans. Advisers can contribute significantly to the growth and stability of small and medium businesses by helping them implement effective employee benefits programmes.”

4/ Ownership concerns

When the business has more than one owner, advisers are in a good position to ask questions that the owners may not have considered. “In cases where multiple owners are involved, the structure of the ownership agreement is paramount for efficient and harmonious business operations,” says Olyott. “While a 50/50 partnership may seem like a balanced arrangement, advisers should assess the specific dynamics of the business and the personalities of the owners.” He recommends considering the following factors:

Decision-making Processes: “Clearly defining decision-making processes can prevent conflicts and ensure that major business decisions are made collaboratively.”

Buy-sell agreements: “Establishing buy-sell agreements helps facilitate the smooth transfer of ownership in the event of retirement, disability, or death of one of the business owners.”

Roles and responsibilities: “Outlining the roles and responsibilities of each owner fosters accountability and reduces the likelihood of disputes over managerial decisions.”

Dispute resolution mechanisms: “Including mechanisms for resolving disputes, such as mediation or arbitration, can prevent legal battles that may jeopardize the business.”

There are also other considerations that must be taken into account to ensure the business continues uninterrupted.

5/ Buy-and-sell insurance

“One of the primary concerns for SMME business owners is ensuring the smooth transition of ownership in the event of a partner’s death or disability. Buy-and-sell insurance, also known as business continuation insurance, plays a crucial role in addressing this concern,” says Barnard. “Buy-and-sell insurance is a contract between business owners that stipulates the terms and conditions under which one party can buy the other’s share of the business. It is typically funded by life or disability insurance policies on the owners’ lives. When an owner passes away or becomes disabled, the insurance proceeds are used to facilitate the purchase of their share by the other participating owner(s). This ensures a fair and orderly transition of ownership and avoids disputes or the need to sell the business to an external party.”

6/ Succession planning

Business owners may not have a solid plan in place for the business beyond their involvement, especially if the business is relatively new or if they feel it’s something they’ll get to later. However, it’s an important part of securing the business’s future. “Financial advisers can guide business owners in developing a robust succession plan,” says Van Niekerk. He adds that advisers can help with identifying successors, valuation of the business, tax planning to minimise the tax burden on both the business and the heirs, and putting key person insurance in place.

7/ Drafting wills 

“Drafting a will is a critical aspect of estate planning for business owners,” says Olyott. He adds that it should cover:

Business assets: “Clearly outline the distribution of business assets among heirs and consider the impact of estate taxes on the business.”

Executor selection: “Choosing a reliable and competent executor is crucial to ensuring the will is executed according to the business owner’s wishes.”

Updating the will: “Regularly reviewing and updating the will is essential, especially in the face of significant life events or changes in the business. The business owner also needs to take their marital regime into consideration and not just the partner agreement of the business.”

Contingency plans: “Wills should include contingency plans for unforeseen events, such as the sudden incapacity or death of key individuals in the business.”

8/ Living wills

Another aspect of planning that a business owner may overlook is the drafting of a living to ensure the business continues running smoothly in the event that they become incapacitated. Van Niekerk says advisers can assist their business owners with:

Appointing power of attorney: “Designating a power of attorney for business affairs ensures that someone trustworthy can manage the business in the owner’s absence.”

Specifying business continuity plans: “Including provisions for the continued operation of the business in the event of the owner’s incapacity is crucial for business continuity.”

Clearly defined health directives: “Addressing health-related decisions in the context of business operations, such as the appointment of a temporary manager, ensures the business remains resilient during challenging times.”

Cyber insurance

Something all businesses have in common is the need for cyber insurance. “Cybercrime has become one of the biggest risks to business survival for South Africa’s SMME sector,” says Pienaar. “The IBM annual Cost of a Data Breach Report shows that breaches have cost local companies an average of over R49 million each, yet many businesses still ignore the threat. A good cybersure policy works alongside IT security protocols and practices, to limit the damage and get businesses back on their feet in the event of a cybercrime incident.”

Advisers can help small business owners ensure they are adequately covered against cybercrime. “Assess and enhance cyber insurance coverage to mitigate the risks associated with data breaches or cyber threats, especially when there are changes in the business structure. Consider the increased vulnerability during transitions for potential cyber risks,” says Coetzee.

When it comes to mitigating risk, small business owners may not have big teams of specialists at their disposal like their larger counterparts, but a clued-up and committed adviser can keep small businesses in business.

Quick notes

Ricardo Coetzee, Head of Auto & General, shares a handy summary of the advice journey for succession planning with small business owners…

1/ Identify and assess the risks: associated with succession planning, including potential financial liabilities, tax implications, and the impact on business operations.

2/ Educate business owners: about the importance of succession planning and the role of short-term insurance in mitigating risks.

3/ Assess and update property and asset insurance coverage: to protect against risks such as fire, theft, or other potential damages during any transition period. Ensure that the insurance coverage reflects the current value of the business assets.

4/ Evaluate and update business interruption insurance: to account for potential disruptions during the succession process. Consider coverage for lost income and additional expenses incurred because of business interruptions.

5/ Review liability insurance coverage: to protect against potential legal claims and liabilities that may arise during the succession planning phase, for instance in case of errors and omissions. Ensure that the coverage aligns with the evolving structure of the business.

6/ Assess and enhance cyber insurance coverage: to manage risks associated with data breaches and other cyber threats, especially when there are changes in the business structure.

7/ Assist in reviewing contracts and agreements: to ensure that insurance requirements are met, especially if there are changes in ownership or management responsibilities. Verify that contractual obligations are adequately covered by insurance policies.

8/ Review vehicle and fleet insurance coverage if applicable: to ensure that it remains adequate during the succession process. Address any changes in the use or ownership of vehicles within the business.

9/ Conduct regular reviews of all short-term insurance policies: to ensure they remain aligned with the evolving needs of the business and the succession plan.

10/ Consider value versus price: when partnering with an insurer and ensure that your client’s business is protected by an insurer that commits to paying 100% of valid claims and that pay-outs occur as quickly as possible to mitigate any cash flow of business interruption issues.