Bullet-proofing SMEs financially

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January 4, 2023
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January 4, 2023

Bullet-proofing SMEs financially

By Finbar Garcia LUTCF, FSS, MFA

Happy New Year! I pray God’s richest blessings, great health, strength, and happiness be upon you and your family in 2023.
After a year of some economic recovery, for the Government, Private Sector, and many individual families, I thought it best to focus on the Small & Medium Enterprises, also referred to as SMEs.
These entrepreneurs (SMEs), while at times do well, fail to bullet-proof their businesses financially. Failure to do this will create difficulties for the future. Business owners want to see enhanced capital and profits, investors, and bankers’ confidence and, of course, growth and succession planning.
In the excitement of starting a business and the expectation that all partners will work happily together for their lifetime; adversity can strike at any time.
By bullet-proofing your business financially, you will need to focus on and implement the following.

Buy-Sell Agreement: This is a legally binding agreement between the partners of the business. It allows for the buy-out of the share ownership based on certain “triggers” like the death or critical illness of a partner.
If not done or funded properly, then the share will go to his/her estate. This creates many unforeseen issues, more so with financial institutions and the business credibility, as the new partner/estate may not have the technical capabilities to successfully manage.
This agreement is typically funded by a life and or critical illness insurance policy on each partner based on the share ownership. The premiums can be paid for by the company based on agreements by the partners or by each partner individually.
While the company grows, the insurance policies are also increased. This is done every two years and will allow sufficient funds to be readily available for the buy-out.
Key point: The life insurance takes care of issues like how, when, to whom, and what price.

Key-man Coverage: All businesses have ‘key employees’, individuals that hold certain key positions whereby they contribute significantly to the company’s bottom line, the profits.
When a key person dies or becomes critically ill, it creates a void that must be replaced immediately, or the company will face a multitude of financial set back.
To avoid these, the company insures their key employees based on certain factors, these are typically the period of adjustment, between three to five years. When a key employee dies, the insurance proceeds are paid directly to the company, as they are the legal owners and beneficiary of the policy.
On the other hand, if the key person becomes critically ill, then the funding is calculated differently. This will take care of additional salaries and the medical care cost to the key employee.
This injection of cash will allow the company to continue operating unhindered financially, while training and developing the new employee. The company will not have to bother about wages, training cost or any other financial setbacks that will erode their profits or capital.
Key point: This life policy ensures that the company protects its liabilities, losses, capital, profits, business continuity.

Corporate Retirement Plan: This is a specially designed, deferred compensation plan for upper management of the company. This policy allows the company to inject a percentage of the employee’s gross salary into this registered policy. The premiums being paid are considered “new income”, meaning that it’s not taken out from the employee’s current income, but is considered an increase in salary that is sent directly to the insurer/policy fund. Upon the company’s age of retirement policy, the employee will receive a lump sum and a pension for life.
These contributions made by the company are considered wages, so it becomes a legitimate expense, and reduces their Corporation Tax. This benefit, once funded properly, will allow the company to operate without any issues of borrowing to fund an owner’s retirement.
Key point: When implemented, this programme will cost less, have survivors benefits, retain employees, flexible incentives, better investment returns.

Cash Funding Buyouts: While we spoke briefly about funding the buy-out if death or critical illness happens, there are times a partner may want to sell his/her share to the remaining partners.
This is a crucial issue. Funding this type of buy-out will depend on the value of the share ownership at the time of the trigger. While a partner may want to leave the business for many reasons, what is critical to the continuance of the business, is the new partnership if the share is sold externally.
This may be an easier way for some businesses, but there may be unforeseen issues that can cause long-term financial problems.
In most cases, it is better to have the remaining partners buy out the share. This funding can be done by means of a company managed/individually owned ‘buy-out fund’. This is an investment type policy that accumulates with interest over the years.
The contributions to the fund can be agreed upon by the partners, by using part of their bonuses, their share of profits and contributions from their income. The partners usually individually own these funds, so when the triggered event occurs, there is money to fund the buy-out or at least a considerable amount accumulated.
Sixty per cent of small businesses do not have a succession plan in place, so why chance your business – bullet-proof it today financially.


Call me for more information on planning your financial future. Send your questions to myfinancialadvisor2020@gmail.com or call 620-1185.