Can Your Company Die of a Heart Attack?
Silly question, right? Actually when you start to think about it whilst a company cannot physically die the same cannot be said for employees and shareholders. Large businesses allocate significant budgets towards risk management as their shareholders demand it. However small business, especially in Dubai, employ far more people and rarely consider risk management until something happens and then it is too late. So this post covers a few points of risk management for smaller companies.
When businesses are formed business partners usually join forces when they recognise an advantage of working together. For example one may be an excellent technician and another good at sourcing new business. Together they are a good team where both parties and their customers benefit, apart the business proposition is very different. If one of these business partners were unable to fulfil their role the other’s livelihood would be seriously impacted.
In the event of an accident or a long term illness of a key employee both the person suffering the accident or sickness and the business needs compensating. If the illness or condition means that they may never return to work a suitable replacement will be required which may not be the first person interviewed. Decisions made in haste due to low funds may be regretted later. By planning for this eventuality the business is better prepared to make the right decisions.
In the event of the death of a shareholder there should be a ‘company will’ in place. This is a legally binding document between all shareholders of a private company which determines what happens in this event including share ownership. Unlike a company listed on a stock exchange there is no ready market for the shares of a privately limited company. Without this legally binding document, a shareholder may bequeath his or her shares to a spouse or relative who has little or no understanding of the business. This can lead to disastrous results. A further risk is that without a binding agreement to sell the shares to the surviving shareholders they may be sold to a competitor or another party not agreed by the other shareholders..
Whilst many companies have a shareholder agreement or company will in place, few have taken steps to make sure they have the necessary capital available to compensate the spouse or other beneficiary of the deceased. Some do not even cover how the shares will be valued thus opening another possible contentious issue. There are several methods of meeting this problem and a financial planner will assist you here.
Other areas to consider are control of bank accounts, if the deceased partner’s signature is required to make payments out of the bank how will the pay roll be made? How will the lives of employees and their families be affected? Will cheques signed by the deceased be honoured by your bank when they are presented for payment by suppliers? How will this affect the standing of the company and business terms it trades on? What about the renewal of the tenancy of the office or factory where the business operates from?
The above only scratches the surface of risk management issues that small business should have a strategy for handling. If you would like to know more please let me know.