Business & Policy
Plan to continue your success
By | Paul R. Vaillancourt CFP CLU CHS and CPCA
You’ve worked hard to make your farming operations a success. There may have been times when you gambled on a business strategy and won – but, for the most part, you stuck to your plan. Now, it’s time for a new plan.
What would happen to your farm business if you were taken away from it, even temporarily? Would it survive? If you’re like most small farming operations, the odds are that your years of careful nurturing and building could come tumbling down without your energetic hands on the reins – because you are your business.
Where will the money come from to pay for your employees, business loans and other operating expenses to keep the farm going and to protect your investment if you get hit with a sudden, extended illness?
If your farming operation is structured as a partnership or corporation, would you wish to buy your partner’s interest or shares in the event of his or her death, disability or critical illness?
You may have a partnership or a shareholders’ agreement in place, which is an excellent start. However does the agreement contemplate death or long-term disability of a co-owner and would you have the necessary funding available to actually purchase their interest, or do you prefer to have your partner’s spouse or child as your new partner?
There’s no need to gamble with your future financial health when you can take some essential steps right now to protect what you’ve built. It’s called business continuation planning and it’s the process of identifying issues that could put your business at risk and adopting strategies to help mitigate or eliminate those risks.
Protect your most important asset: yourself
As a farm owner, you understand the need to protect against risks to your capital assets: that’s why you have fire, theft and other forms of insurance. But one of the major, yet often overlooked, risks faced by nearly every business is the temporary loss of vital human capital: the loss of a business owner due to a disability as the result of an accident, an extended illness, or even a life-threatening critical illness.
The risk is more likely than you think. Ninety per cent of Canadians have at least one risk factor for heart disease or stroke, according to the Heart and Stroke Foundation. The disability rate increases steadily with age beginning around age 25. Adults aged 45 to 54 have a disability rate of 15.1 per cent, according to a 2006 participation and activity limitation survey by Statistics Canada. And, on average, 500 Canadians will be diagnosed with cancer every day, according to the Canadian Cancer Society.
With the right business continuation plan, you’ll protect your business and your income in a number of ways:
• supporting continued business performance, profitability and productivity
• assuring that business debts can be serviced
• retaining employees who will continue to view the business as viable
• maintaining good supplier relationships
• preserving your customer/client base
Ensuring effective risk management
The risks posed by the temporary loss of a primary farm owner can be economically managed with critical illness and disability insurance, the cornerstones of an effective business continuation plan.
Disability insurance allows an owner to fund the payment of ongoing essential business expenses such as salaries of employees, utilities and property taxes (Business Overhead Expense Disability Insurance) and replacement of personal income to pay family expenses during the period of the disability with tax-free dollars (Personal Disability Insurance).
Critical illness insurance pays a one-time lump sum to help cover losses created by the owner’s absence. When the insured person is diagnosed with a critical illness or condition as defined in the policy, the benefit is paid; how it is used is totally up to the recipient. It can be used to provide a vital injection of cash to pay recurring business expenses or to make payments on loans or to suppliers.
The other keys to continuation
Personal protection is key to every business continuation plan.
Here are some other plan elements to consider:
• Key person life insurance ensures there will be a timely injection of tax-free capital should your business suffer the loss of a top producer or other essential employee.
• Buy-sell life insurance can fund your purchase of a deceased partner or shareholder’s financial interest in the business.
• Disability and/or critical illness buy-out insurance provides a lump-sum tax-free payment to fund your purchase of a deceased partner or shareholder’s financial interest in the business.
• Potential creditor protection by use of personally owned segregated investment funds.
You have spent a lot of time developing and growing your successful farm business. It wasn’t easy and it continues to evolve in response to the market demand and customer needs. Your business continuation plan is a vital component of your operations. Protect what you’ve built with a business continuation plan tailored to your business: it’s vital to your continued success, come what may.
This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Paul Vaillancourt is solely responsible for its content. For more information on this topic or any other financial matter, please contact an Investors Group Consultant.