|
Money
Matters
with Raziah Ahmed
Parkinson’s
Law is a theoretical construct, which says: “Work expands
to fill the time available for its completion.” The trick
then must be to know all and every facet of the work to be
done, so that we have the requisite time to do it all.
One reason that small business owners, and one-man professional
businesses tend to have no real structured pension plans and
health plans, or succession planning, is because these aspects
of the job were never conceived as part of the business in
the first place. Usually these aspects of the business are
after thoughts, and time is hesitatingly allocated to attend
to these important matters.
The illusion tends to be that “I can make money faster
than you can invest in pension plans, or else that health
insurance is an employee benefit for which business owners
have to fork out cash.
Last week we looked at key person insurance, and critical
illness insurances as means to ensure that cash will be available
for business continuity, in the event of disability or death.
The buy-sell agreement is a legal document, normally drawn
up by a lawyer, that describes how the money realised from
the policy proceeds will be used. Such agreements are crucial
for business continuity and safeguard against misuse or misappropriation
of the insurances proceeds.
Limited liability companies have shareholders who own specific
amounts of shares, which represent equity, or ownership of
the business.
Upon death of a key person who is a shareholder, the legal
heirs to those shares become business owners. Is there a danger
in this? Yes there is, unless the heirs are themselves astute
business people, or have been actively involved in the business.
The danger can be that incompetent or inexperienced persons
becoming decision makers by virtue of their capacity to vote
at board meetings. The danger can also be a need to grab for
lost income (the result of the death of a bread winner), so
the heirs may now insist upon their own employment in the
business.
The buy-sell agreement would avoid such predicaments, by mandating,
for example, that heirs sell off their shares to the remaining
owners/key persons. The money to buy the shares from the persons
who have inherited shares could come from the insurance proceeds.
An alternative to insurance protection in this scenario could
be the establishment of a sinking fund. A sinking fund is
merely the establishment of a stream of savings in deposits,
which can be accessed if untoward events unfold.
Prudent investment will add value to the fund, but the business
will pay dollar for dollar to finance the buy-sell mandates,
unlike that using an insurance solution.
There is an old school in organisation behaviour theory, put
forward by Lyndall Urwick in the UK in the early 50’s,
called the ten Principles of Organisation. It talks about
objective being a principle, which is an expression of the
business purpose. It also singles out these elements as principles:
authority, definition, span of control and correspondence.
More particularly, it supports the view that the principle
of continuity should be in the genesis of every business plan
and incorporated into the planned structure. The essential
element is that re-organisation is a continuous process, and
specific provision must be made for contingencies with the
potential to disrupt the business.
It should not be an afterthought to structure for death, retirement
and ill health, but ironically, the Peter Principle is also
a truism: in an hierarchy, everyone will tend to rise to his
highest level of incompetence.
|
