In South Africa, small businesses employ more than half the workforce and are responsible for up to 80% of new jobs created1. If you’re a small business owner, you are most likely well aware that your business may be more sensitive to change than larger businesses. Poor economic growth, interest rate increases and customer demand all have their own significant impacts, without any other added pressure.
However, while the focus is on these external factors, there are very real internal factors that business owners need to be cognisant of. The factor that needs to be considered is how your business will be affected if a key person had to suddenly become disabled or even worse, pass away. Not making provision for this will have a massive impact on the business itself, as well as create a potential pitfall for the micro economy in which the small business operates, as SMEs play a vital role in economic growth in any given area.
These employees are known as “key persons” as they have a unique skill set, strategic client base, or other business relationships that are critical to the success of the business.
With this being said, business owners should take the necessary steps to ensure that should this key person become disabled or – worse – die, the business’ bottom line will not be adversely affected.
What constitutes a key employee?As an example, perhaps you are the owner of a well-respected, highly successful restaurant in the heart of the city. You have worked towards building the reputation of the restaurant, through great food and service. One day you receive a phone call saying that your head chef had been killed in a car accident. What would happen to your business without him? Your customer’s will still expect the same quality of food and service, with or without your chef. Not being able to meet those expectations could have long term consequences on your profits and business viability.
Protecting your ‘people assets’Key person insurance ensures that if a core member of your team suddenly dies, your business will receive a lump sum payment. This is similar to a life insurance policy, but the beneficiary is the company, not a family member. This pay-out assists with tiding your business over during this time, as well as sourcing, recruiting and training a replacement or even repaying any debts or loans the key person may have had.
Key employee cover can apply to a business owner, a founder or a vital employee. Whoever is covered, the point of this cover is to help protect the company survive the shock of potentially losing this person.
Establish the ValueBusiness owners who decide to take out this kind of policy should remember to establish the value of the key person. This means quantifying the financial loss that will be incurred, should this person die or become disabled. Following this, it is important to shape the cover required in order to meet this need, and keep all the necessary documents in a safe place.
Final thoughtsLooked at from an entrepreneurial angle, key person insurance is critical for businesses of all sizes, however it is more important for SME businesses, as these models may have limited finances, less flexibility and fewer resources to recover the distressing loss of an employee or their ability to deliver as they did previously.
It does not seem out of the ordinary for a business owner to insure physical assets, and similarly it should not seem any different to protect against the loss of its most valuable assets - the people who hold specialist knowledge, skill and expertise. These people, more often than not - may not be as easily replaced as a building or a vehicle, and making a decision around key employee insurance is critical to your businesses longevity.