Basic Rules for Protecting a Business

Basic Rules for

Protecting a Business

Don’t know where to start?
Here are some basic guidelines to follow when looking to protect your small business.


Always Protect the Costs-to-Stay-Open-for-Business first

The costs to stay open for business are the 'fixed overhead costs' and are often contractual in nature. Make sure you have 12 months of fixed-cost funding on hand, just in case, so you can have a business to come back to after you recover from an unexpected sickness or accident, or so you can have an active business to sell as an ongoing concern if you have not yet recovered after 12 months. Insuring the Fixed Overhead Costs reduces the risk to a small business.


Always Protect the Key Revenue Maker

The biggest risk to a small business is usually its overreliance on its Owner. Whether the Business Owner, a Specialist Expert or a Key Person, most businesses derive the bulk of their revenue from a few key individuals.

Insuring the Key Person to the business protects a business from the financial dips that can occur if there's an unexpected loss of an owner, manager, partner, or skilled employee through sickness, injury or even death.


Always Protect the Business Debts

Businesses use debt to start-up or to grow. Whether these funds are supplied by the owner (Directors Loan Account) an external funder (using 1st mortgage security over property assets) or investors (usually a combination of mortgages and Director Personal Guarantees), nothing stops a business like an unexpected and immediate call-up of debts, well before they're expected to be repaid. Nothing stresses a business and its suppliers as having difficulty meeting its loan and debt obligations. Insuring the Business Debts & Liabilities from sickness, accident, or even death of the Owner, Business Partner or Key Person reduces the risk to a small business.


Always Protect the Business Ownership

Owning a business in Partnership with another means all the Partners need to protect their portion (equity investment) in the business to make sure the future control of the business stays with them. A forced change in ownership, due to one or more of the partners unexpectedly suffering a motor vehicle accident, ill health, or even death and then selling their shares, could destabilise the business ownership and risk its future. Protecting business ownership with a Partnership Agreement, Company Powers of Attorney and Insuring the Business Ownership, help reduce the risk to a small business.


Find a Risk Adviser specialising in working with Small Business Owners and their Families

Protecting yourself and your family from the risk of running a business is key to business and family harmony (and peace of mind). This is because small businesses and the families that support them have different risks, liabilities, and time constraints than average employee-based families. The team at Sapience Financial specialise in working with small business owners and their families, Sole Traders, Partnerships and Multi-owner business, and their Companies to help them protect themselves from their business.

Business Debt AND Ownership Protection Insurance explained

businessman and his small children climbing on him as he works on a laptop computer

Shareholder and Capital Protection

Who is the owner a business is usually easy to explain; but who are the shareholders (and beneficiaries) in its future value, can be more difficult to identify. The overwhelming majority of small business owners cite a key reason for their working in a small business is for their family's future benefit.

A Shareholder and Capital Protection insurance strategy ensures there are sufficient funds available and documents to confirm a commercial agreement exists, so that if a business Partner or Shareholder were to become disabled, terminally ill or even unexpectantly die;

  1. there is a pre-agreed and legally documented buy-and-sell arrangement in place, and
  2. there is an insurance policy in place with sufficient cover to fund the pre-agreed buyout, pay taxes and complete the sale of that share of the business to the surviving owners and or shareholders.

Pro Tip: A personal Critical Illness insurance policy can also be added to the strategy extending the Shareholder Protection strategy to include protection against serious sickness and accidents too.

This agreement between business owners ensures that shareholders maintain the rights and the money (from an insurance payout) to buy the remaining share and retain control of the business.

Who is this for?

While different businesses all have unique strengths and needs, the one common denominator to all of them is they all run on people and capital. Protecting both, is part of a Shareholder and Capital Protection strategy.

  • All businesses have an Owner, a Founder, usually a Key Person, and use capital to help it all grow.
  • Capital and Shareholder protection strategies are designed to help protect the future value of a shareholder's interest and ownership in a business and protect the invested capital injected into that business as part of its growth strategy.

Protecting Ownership by funding the power to buy out your business partner if needed

Many businesses are owned by more than one individual or entity and it's not long until most businesses begin to 'owe money' to their Directors, and then to external investors and lenders to meet capital needs for expansion and growth.

This introduces a unique multi-owner business risk where if one owner needs to depart the business because of sickness, illness, disability, or unexpected death, this strategy can ensure the remaining owner has the legal rights to buy out and sufficient funds available to purchase a departing owner's (or shareholder's) ownership portion.

But that’s often easier said than done, especially when it comes to capital raising and capital protection, and business debts.

Protecting Capital investment

Using investment borrowing to grow a company can be exhilarating. Over the years we've seen many small to medium (SME) businesses establish themselves and grow successfully in a variety of economic conditions. We've also seen others that stalled for reasons sometimes only recognisable in hindsight.

But as exciting as the new cash flow injection may be, it can be equally threatening. Built into the process of borrowing money from others - either as capital raising investment or capital use borrowing, are certain harsh realities that can seriously damage a business if you are not prepared for them.

  • SME’s are usually heavily dependent upon an owner or a Key Person during the early years of the business.
  • Businesses need funding and access to capital (sometimes from the start-up and initial development) usually at their first growth inhibitor of around $750k.

Protecting the Owners Loan Account entitlement

An often important consideration that is missed it understanding most business have a Director's Loan Account on the books – accountant speak for, money lent to the business by the owner – that needs to be repaid to the owner or their family upon its sale or the unexpected death or disability of the owner, who lent that money to the business. Just because the owner lent money to the business doesn't mean that it is any less valuable or less worthy of protecting; especially as the business owner and their family are probably relying upon the business to enable them, to retire one day.

Protecting Capital investments and uncomfortable questions for investors and founders alike

Capital investments need to be protected from the associated statistical people-based-risks every business is exposed to. This means the health of the Founder, Director, Business Partners or Key People is an important determinant for an investor and is often overlooked.

The Investor's questions

Investors normally set the expected rate of return to match the degree of risk an investor is taking — usually referred to as 'rate to risk'.

While 'due diligence' is said to be, 'the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party,' the question remains, is the capital investment able to be adequately protected?

More simply put, "Is the company Director or Key Person insurable?"

Is the company Director or Key Person insurable?

What's the effect of a Director, Partner or Key Person in a business not being able to gain personal insurance?

  • Does this mean the capital investment cannot be insured?
  • Does this affect the credit-worthiness (or the invest-ability) of the small business?

Either way, investors who do not consider and rate the risk accordingly, may be facing a low-risk venture that is actually more a high-risk venture.

Are you investing in a Business, or its People - or both?

There are so many ways to invest in a small to medium (SME) business. Time, provision of expertise or assets, introducing relationships, good ideas and capital investments. The list can appear endless.

The unspoken problem for Capital Investors and Shareholders in a business

You cannot automatically assume that all Directors, Business Partners or Key People are insurable.

Investors are often kept in the dark about such matters and usually, Directors, Business Partners and Key people only learn about their individual health-related conditions when investments are completed and they are only then seeking to set up personal insurance as part of a deed of agreement, to offset the risk.

People, processes and Capital Protection

Small to medium businesses (SME's) are essentially about people and processes.

Because all businesses are built upon and managed by people, they’re all exposed to the same people-based risks. These are the statistical realities of life, we refer to them as The Numbers of Life and The Numbers of Business.

  • Statistical risks are ones you cannot avoid, only better manage for possible outcomes.
  • Environments (process) risks are managed by good procedures and processes.

Know your statically greatest risk

Knowing which of these risks is statistically working against you is key to insightful investment decisions and protecting capital investments in an SME.

For example:

  • What is the risk to invested capital if there are no Life insurance products in use on the lives of the company Director, Founder or Key People - all contributing to the repaying of invested capital?
  • Worst still, what's the risk to the capital invested if the Director, Business Partners or Key Person supporting the business, are personally uninsurable?
  • Does this aspect need to change the interest rate such investments command, or does it make a capital investment overall less appealing?

Read our article: Prostate cancer surgery and its disturbing new link to business risk about radical prostate surgery and unexpected cognitive decline.

Pro Insights | Shareholders Agreements and the deficiency in the detail

Capital Protection and Shareholders Agreements are designed to protect invested capital from known insurable major risks. These documents typically require insurance to be in place to safeguard against the ‘unexpected death or long-term disability’ of a director (or Keyperson).

For example, if a $500,000 capital investment is made into a new business venture, it's usual for a $500,000 insurance policy to be put in place to protect the shareholders from the capital loss that would result from the unexpected death or extended disability of the director or (key person) in the venture.

  • The Keyperson Agreement wording is usually along the lines of; “...death or extended incapacity of the persons referred to in this agreement ...”

The mistake of protecting the lowest risk, while ignoring the highest

But as these agreements are often drafted by lawyers who are not financial advisers, they’re often unfamiliar with the changing data around statistical risks to the business.

The unintended consequence can be drafting a shareholders agreement that only requires protection from the statistically lowest insurable risk events (like unexpected death or long-term disability) and not the insurable high-risk event (a health crisis event) like prostate or breast cancer.

Rating for risk and protecting capital investments

At Sapience Financial, we address the statistically predictable people risks so business owners, management teams and investors alike can reduce their exposure to their people-based risks, and protect their business and its shareholders from the risk to its capital borrowings and investment.

Different businesses all have very different needs and unique strengths but the one common denominator to all of them is they all run on people and capital.

Frequently Asked Questions about Capital and Shareholder Protection

What is a business-secured creditor?

A secured creditor is one that holds a security interest, such as a caveat or a mortgage over some or all of the company’s assets, to secure a debt owed by the company. As lenders usually require security when they provide a loan, the best way for a creditor to secure their interest is by registering it in the Personal Property Securities Register (PPSR), an online register of all personal property that has security interests registered against it.

Likewise, an unsecured creditor is one who does not have a security interest over the company’s assets and whose interests are secondary during a forced debt legal repayment action.

What is a director's guarantee?

A Director Guarantee agreement is a document signed by a company director giving a personal guarantee that the director will be liable for the company's debt or commitment if the company does not meet that obligation. Directors' Guarantees are lower on the hierarchy of debt security behind 1st mortgage' guarantees and registered debt holders.

Who gets paid first when a company is in liquidation?

Company liquidation is a legal process by which a company’s assets are sold, its debts paid as far as possible and the company is closed or deregistered. If the same personal property is used as a guarantee for two or more different debts, priority rules apply.

If the debtor defaults, the rules determine the order of priority in which the various secured parties can enforce their security interests.


  • a secured creditor has priority over an unsecured creditor
  • priority between two secured creditors is determined on a first-in-time basis
  • there is no priority between unsecured creditors.

Therefore, the company liquidator will only pay unsecured creditors if there are funds left over after payment of the costs of liquidation and payment to secured creditors and employees. Usually, the order in which funds are distributed after payment of liquidation costs and secured creditors is:

  1. outstanding employee wages and superannuation, then
  2. outstanding employee leaves of absence, including annual leave, sick leave (where applicable) and long service leave, then
  3. employee retrenchment pay, then
  4. unsecured creditors.

Harsh realities

Each category is paid in full, before the next category is paid.

If there are insufficient funds to pay a creditor category in full, the available funds are paid on a pro-rata basis (and the next creditor category or categories will be paid nothing).

How we can help

Business Shareholder and Capital Protection insurance strategies are an important part of protecting your business and your family, from the business.

Contact us for a confidential chat about your needs.

Related: Types of Business Insurance products we work with

There are lots of different types of risk protection insurance that can help in different situations.

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