Home' Trinidad and Tobago Guardian : November 1st 2015 Contents NOVEMBER 1 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCIAL PLANNING | SBG7
The case artin, 50, is the father of
two children Stephanie,
19, and Tammy, 5.
After Stephanie s mum died Martin remarried
Sarah, 35, who is a stay-at-home mum.
Stephanie started university last year so Martin
matured his two annuities and collected a total
of $250,000 after taxes, to pay school fees. He,
however, still has to cough up an additional
$150,000 over the next three years, which he
is planning to finance out of his drawings from
a business jointly owned with best friend Wayne.
His friend owns the majority (51 per cent) of
Martin also services a $1.8 million mortgage
with income of $35,000, $20,000 of which
comes from the business. The partners have
built up a good name in business over the last
ten years in a highly competitive industry and
in no small part to each director s unique skills
set. (Martin s technical expertise added to
Wayne s marketing mastermind). They have
also attributed their success to five loyal employ-
ees who tirelessly serve their 150-plus clien-
In recent times, a competitor has been court-
ing to buy their company which generated $2.4
million in revenues last year. The price tag is
$7.4 million. The partners refused to sell despite
a recent dip in activity. This dip is as a result
of Wayne s absence from the business because
of an urgent family matter. His younger brother,
Jason, was involved in a serious vehicular accident
on his way to work and that left him in a coma.
The incident triggered some uneasiness in
Martin s mind as he thought to himself that
this could happen to anyone and impact the
status quo of all concerned.
Nick's assessment and advice
How easy it is for us to take things for granted
when all is well?
When an incident such as Jason s occurs, we
often take time to think of how tenuous life can
be. Who would imagine Jason s well-being could
impact Stephanie s education? These are two
unrelated issues. But are they really?
If Wayne s absence from work persists then
the money that Martin planned to use to fund
Stephanie s education is at risk as more than
50 per cent of his income comes from the busi-
ness. This makes Wayne and Martin key players
in the business; an unsettling thought! To under-
stand the impact on the company if one of the
directors is lost, we need to examine the rela-
tionships with the various stakeholders.
If either partner were prematurely and per-
manently removed from the business, it would
not only lose their two unique skills set but also
their contribution to the management of the
company. Of course, the survivor could hire a
replacement but that new person---whether an
employee or new partner---would take some
time to come up to speed; if at all completely
fill the shoes of the missing person.
Either way, it will impact customers who
depend on the company and, regardless of their
loyalty, they will only stick around as long as
their needs are being met. Failure to satisfy
these needs will leave customers no choice but
to "go across the road" to the competition,
threatening revenues and affecting the company s
ability to meet financial obligations.
Like customers, employees have their bills to
pay and their families to feed. When this is at
risk they will seek alternative employment, even
with the competition. At this point not only
functional knowledge will be lost but also valu-
able trade secrets.
The domino effect extends further to the
company s lenders who have provided funding
for day-to-day operation and or business expan-
sion. Regardless of how great the company s
past financial track record, the bank has to
protect its depositors interests and would move
to call facilities in event of default. A noteworthy
point is that in the realm of debt collection,
creditors know that "the early bird gets the
worm" and the "squeakiest wheel will get grease."
A beleaguered company could negatively
impact suppliers and their respective stakeholders
if the B2B (business to business) relationship is
significant. The existence of credit will further
amplify the problem if payments of supplier
bills are slow or discontinued.
If a key player is also a significant shareholder,
then the value of the company attributable to
them will naturally enter the hands of the depart-
ed s heirs and assigns. Shares that attract voting
rights could eventually affect who sits on the
board of directors or assumes management
positions. In the absence of a well-funded buy-
sell agreement, the surviving partner(s)/share-
holders will inherit new person(s) who may not
adequately fill the lost position or fit into organ-
isation s culture. What ensues is friction and
If either Martin or Wayne should die or
become incapacitated their respective families
will feel the direct effect of the lost income and
the shrinkage of their stake in the asset. In Mar-
tin s case (if Wayne is gone) it could mean no
education for Stephanie and Tammy, no roof
over their heads and no food on the table. The
house may need to be sold and Sarah forced to
face the job market.
Money is lifeblood
Of course, if both Martin and his business
had adequate cash reserves then it wouldn t be
a problem to sustain the transition, clear debts
and facilitate purchase of the deceased s shares
(at fair value).
The challenge with many businesses is that
having too much cash on hand means the com-
pany s assets are underproductive, as such, it
is not uncommon that businesses with healthy
cash flows hold less cash on hand if there are
potential investment opportunities available
with better return prospects.
Astute owners often choose to pay a premium
for potential cash rather than having excess
actual cash on hand, especially if the cost of
not investing is greater than the said premium.
Potential cash only materialises when a prede-
termined risk occurs such as death or disability
of a key person. Part or all of any premium
paid to protect against such a risk can be allowed
as a deductible expense for tax purposes.
Life and or disability insurance is the most
economical way to transfer the financial risks
commonly associated with the loss of a key
person. Martin (and vice versa Wayne) should
have adequate coverage in place to do the fol-
1. Clear a mortgage or other personal debts
2. Provide funding for children s education
3. Replace lost family income through invest-
4. Provide funding for "buy-sell agreements"
so surviving partners buy out shares
5. Repay business creditors and lenders
6. Provide funds to cover overheads to stabilise
operations until its business as usual
There are many ways evaluate the life and
disability insurance needs of a business but
based on the data given we have provided a
simple approach in the table.
NOTE: Martin also has an insurable interest
in the life of Stephanie especially as he tapped
into his retirement ($250,000) to fund her edu-
cation. Such policies can be later transferred to
the dependent once they self-sufficient.
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