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How do we go about advising SMME business owner clients with limited insurance budgets?

An important point of departure from an advice point of view is that SMME business owners face largely the same risks as larger and even corporate clients, but that they do not necessarily have the means to deal with them in the same way. As we are unable to determine either the timing or quantum of risks, it is thus self-evident then that any advice, products and services need to take these unknown elements into account.

Secondly, it is important to identify, evaluate and decide how to treat all risks relevant to the business. Once this is done, one needs to prioritise these risks in terms of the potential impact on the business. 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 cost of treating the risks are and which risks pose such a risk that one needs to contract out of these.

The advice around risk is extensive and it needs to be, if it is to be effective. 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.

Obviously these risk outcomes will vary as a business grows and develops. It is also true in a business environment that the rules of the game change with new legislation or with the effect of new technology or social economic conditions. The astute adviser takes this into account when discussing the full spectrum of financial and risk services of their clients. It is always recommended that these discussions do not take place in isolation of each other even though the advice and service may be rendered by different parties due to the inherent complexities and nuances of each element.

A birds’ eye overview of a client’s risk and insurance needs may look something like this:

  1. Long-term insurance needs of South African business owners

    South African business owners require a tailored approach to long-term insurance that aligns with the unique challenges and opportunities in their industry. Insurance advisers play a vital role in understanding the specific risks associated with the business and crafting comprehensive solutions. Key areas to address include:

    Business Interruption: Entrepreneurs should be protected against unforeseen events that could disrupt their operations, such as natural disasters, equipment failure, or economic downturns.

    Buy and Sell / Key Person Insurance / Contingent liability / Debit and Credit loan account and business overhead expenses: 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. Any loan agreement is also rated highly to protect in these events.

    Liability Insurance: Businesses need protection against legal claims and liabilities, including public liability, professional indemnity, and product liability insurance.

    Employee Benefits: Providing comprehensive benefits to employees is essential for attracting and retaining talent. This includes health insurance, life insurance, and retirement plans.

    Asset Protection: Entrepreneurs should safeguard their personal and business assets through appropriate insurance coverage, ensuring financial security in the face of unforeseen events.

    It is perhaps clear from the above synopsis that when one talks long-term insurance or life insurance, we cannot assess this in isolation of the non-life side of things and, for instance, business interruption may have a life and non-life element to it.


  1. Structuring ownership agreements for efficiency

    In cases where multiple owners are involved, the structure of the ownership agreement is paramount for efficient and harmonious business operations. 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. Factors to consider include:

    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 jeopardise the business.


  1. Structuring succession planning with financial advisers

    Succession planning is a critical aspect of ensuring the longevity of a business. Financial advisers can guide business owners in developing a robust succession plan that includes:

    Identifying successors: Advisers can assist in identifying and grooming potential successors, ensuring a seamless transition in leadership.

    Valuation of the business: Accurate business valuation is essential for fair distribution of assets among heirs or buyers.

    Tax planning: Financial advisers can help structure the succession plan in a tax-efficient manner, minimising the financial burden on both the business and heirs.

    Insurance for key person: Ensuring there is adequate insurance coverage for key individuals involved in the succession plan protects the business against potential financial setbacks.


  1. Drafting wills for business owners

    Drafting a will is a critical aspect of estate planning for business owners. Advisers should consider the following when assisting entrepreneurs in creating their wills:

    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.

    Marital regime: 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.


  1. Living wills in the context of business owners

    While living wills are typically associated with healthcare decisions, business owners should also consider them as part of their comprehensive planning. Advisers can guide entrepreneurs in:

    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.


Employee Benefits for small and medium businesses

In addition to the five areas outlined above, advisers can also contribute significantly to the growth and stability of small and medium businesses by helping them implement effective employee benefits programmes. Prioritising benefits such as health insurance, retirement plans, group risk insurance, flexible work arrangements and professional development opportunities, business owners can enhance employee satisfaction and loyalty. It can also assist in attracting the required talent.

South African insurance advisers play a pivotal role in supporting entrepreneurial business clients by addressing their business risks, long-term and non-life insurance needs. Through a comprehensive approach that covers ownership agreements, succession planning, wills, living wills, and employee benefits, advisers can guide business owners towards financial stability, risk mitigation, and sustainable growth. As the business landscape continues to evolve, the partnership between entrepreneurs and insurance advisers becomes increasingly indispensable for securing a prosperous future.