If you’re a SME in Singapore you should make a conscious effort to protect your business. The Singapore Government (and many others around the world) makes you take out an insurance policy when you renew your road tax, hire a domestic helper or own property. Why aren’t business owners required to do the same?
The simple answer is that the Government doesn’t want to make it too difficult to start a business in Singapore. But that doesn’t mean the risks aren’t there.
Starting a business venture is one of the riskiest ventures you’ll ever take in your lifetime. You’ll be putting in time, money, sweat, blood and tears, with no guarantees of any returns, with a clear risk of losing everything you’ve put in.
If you make a profit, that’s great! You’ll have the enviable option of formulating a plan to protect your business for the future. Here are the 5 steps you should take.
Step 1: Prepare for business inevitabilities
The first document you’ll have drawn up before you ever open shop is usually a business plan, setting out your strategies, market and clients. A SWOT analysis, in short – a listing of your business’s strengths, weaknesses, opportunities, and threats is a great start to your efforts to protect your business
The second document should be your Buy and Sell Agreement (BSA). When it comes to business continuity, this is arguably the most important legal document of all. It determines how shares will be transferred, and to whom, when certain triggering events occur, such as bankruptcy, death or disability.
Many business owners bequeath their shares of the company to their immediate family or named beneficiaries. But this can pose a problem for the company if the inheritors of those shares do not want a stake in the business.
An insurance policy can be structured to provide the funds needed for the remaining partners to buy over the shares from the deceased’s estate, so that the company’s operating dynamics are not adversely altered by this event.
Step 2: Appoint a trustee; set up a trust account
When the BSA is carried out, how do you ensure that the instructions of the partnership agreement are executed correctly – legally? There is a risk that the majority of the shares may land in the wrong hands, for example, beneficiaries who wish to dissolve the business.
A legal trustee, which is a neutral party, should be appointed to carry out all the necessary actions to fulfil the terms of your BSA agreement legally and correctly.
The trustee will also oversee a trust account, which holds in trust any business assets that may be transferred, such as title deeds or share certificates, on behalf of the beneficiaries. This is good for the company owners, as only the trustee will have access to these assets, reducing opportunities for breach of trust by the other partners.
Step 3: Identify key persons
Oftentimes, the success of a business is built on the abilities or efforts of one particular person, or key employees. If anything should happen to these people, the continuity of the business may be adversely affected.
Key person insurance is a life insurance policy that assures the ability of the company to continue operating without these key persons until a replacement can be found and trained.
A business that is built on the specific talents of any one person should not go without key person insurance, to protect its ability to carry on operating.
Step 4: Protect your business against debt default
Many company owners take up bank loans to finance their businesses. They often do so in their personal capacity, using their own estate as collateral.
However, should something happen to them, their immediate family may be saddled with immense debt burdens. As many small to medium companies employ immediate family members as staff also, this can pose a danger to the business as they struggle to pay off these debts.
Debt cancellation products are useful here, as they provide a financial cushion against the emotional blow dealt by disability or death, and allow the company to continue operations unhindered by financial burden.
Step 5: Put profits to use during good years
Finally, making money is the reason why people go into business. When the business starts raking in profits, business owners often cash out and go to town, or invest all the profits back into the business.
But good times don’t last forever. The money that has been taken out and spent cannot be taken out twice. Profits reinvested into the business are not guaranteed to churn out even more profits.
Here’s where the trust account comes into play. A trust account is designed to hold assets of the business. These assets can include investment or retirement policies, whose premiums are paid from the company’s profits during good times.
In the event that the business goes into a downward spiral, these policies will ensure a continued income for the company owners, and may even buy enough time for them to revive the company’s fortunes.
Want to know more about how to shield your business from risk? Free Consultation Available