Bill’s Blog | October 26, 2023
First, let me share how vital small and larger businesses are to the Canadian economy.
- 98% of Canadian businesses are small companies.
- Small businesses employ over 10 million Canadians.
- Small and medium-sized companies contribute over half of Canada’s GDP.
- Small business = less than 100 employees.
- Medium business = 101 to 500 employees.
- 74% of Canadian companies have less than ten employees.
I applaud those men and women with the courage, perseverance, skills and capital to build our Nation and provide so much benefit to our people by providing meaningful jobs/careers and supporting families. Thank you!
When I talk to and mentor young people considering starting a business, I tell them how difficult it is to build a company. It is a small miracle if you can make it through the first two years (95% of start-ups fail). Then, if you can make it to five years, you have a chance at a long-term business.
People dream of building and owning their own company for hundreds of reasons. Whether you are a hairdresser, retailer, service provider, manufacturer, farmer or life insurance broker like myself, there are just a few essentials to build a solid business. However, for a business to succeed, it must create real value in the marketplace and hopefully do so with integrity. As a note, wise governments keep regulations and taxes to a minimum so businesses can prosper.
What should be a critical focus for those who have taken the plunge and have a growing business? Protect what you have worked so hard to build! Let me share a few strategies for you to consider. These are ideas I have helped business owners who want to fortify their businesses and protect against significant risks.
Strategy One: Key Person Coverage
If you are one of the 98% of small business owners with less than ten employees or have built a more extensive team, key person insurance can be critical to your success. Most companies have one, two or a few vital employees on their team. How would this impact your business if one or more key persons were to get seriously ill or die? In both cases, the company can purchase critical illness and life insurance for the key person or persons. The business funds the premiums for the insurance, and if the key person passes away or becomes critically ill, the company receives the payout (tax-free). It can fund a temporary or permanent person, reducing the stress on the business.
Strategy Two: Buy-Sell Agreement
So, what is a buy-sell agreement? A BSA is a legally binding agreement if a partner dies or leaves the business. The partners agree on a fair market sale price of their shares in the BSA. There are four ways to structure a BSA, so you will need wise counsel from a law firm and an accountant. Often, several severe issues arise if one of the partners prematurely dies. First, the spouse and family often do not have the desire or skillset to continue running the company, and they require payment for their shares. Second, depending on the business’s financial success, the payout can be hundreds of thousands or even millions to the deceased’s family members. How will this be paid out the shares reasonably quickly?
Will the remaining partner or partners have to take out a large loan (if they can get one), or will they have to sell many assets that can harm the business? So, what would be a superior option? Life insurance can be a very efficient way to protect against this valid risk. The company funds the BSA with life insurance and receives the payout usually within 30 days of the verification of the deceased partner. The insurance proceeds fulfill the family’s payment needs and reduce the risk to the business in a very challenging time.
Strategy Three: Business Loan Protection
Building or expanding a company often requires borrowing money from a bank or banks. If we have a strong economy and the business is well-run, generally, prepayment is not a problem. However, if the owner or a partner passes away prematurely or becomes seriously ill and there is a large debt, the business income or cash reserves can become highly stressed. Protecting a loan with life and critical illness insurance is often very affordable and brings peace of mind with life uncertainties.
Strategy Four: Corporate Retirement Strategy
It is becoming increasingly critical that business owners properly diversify their wealth into many baskets. The business purchases a whole-life policy to diversify the company’s retained earnings. The corporate retirement strategy is an excellent option for several reasons.
- Provides a tax-free death benefit to the corporation
- Build wealth with tax-deferred cash values.
- Uses the many benefits of being a life insurance contract: beneficiary designation, possible creditor protection of the asset, stable dividends, etc.
- Tax-free income once cash value is collateralized to a bank during retirement years.
Please reach out to me if you have any questions.
Bill Westmacott, Financial Educator, Life Insurance Broker and Wealth Solution Provider