What happens when the dominos begin to fall in a business?

A detailed insight into a business interruption event

Most business owners are focused on the day-to-day delivery of their products and services and doing the best for their customers.

Sometimes we forget to talk about the reality of business interruption and how we can prepare for those times.

In this article

In my work as a specialist risk adviser to small business owners and their families, my job is to help them see over the horizon at the statistical realities of the risks to life and business we all face.

My job is to help put a strategy in place to stop the domino effect of business interruption destroying a business and the family who support it.

The biggest mistake small business owners make is this. ‘We overestimate our ability to function well during times of immense emotional and professional stress and we underestimate the amount of resources we’ll need to survive, recover and rebuild.”

Life and small business always intersect

When my elderly mother fell over and broke everything, the sad reality was she needed to be moved into full-time care. You’d think the monthly accommodation fee would cover everything – it doesn’t. Hundreds of extra dollars a week were needed to help provide her with a comfortable and familiar standard of living. I’d describe the process as 'tearing up $100 notes every few days and throwing them out the car window'.

Until you’ve been to the rainy side of life and business (or worked with people who have), it’s difficult for most people to really appreciate the reality, risks, and cost involved.

Having a financial adviser for your business can help you see what might be around the corner and how to be ready for that event.

It’s teamwork

Business is really about teamwork. The business owner provides the momentum and direction for the business.

• A key person is usually responsible for generating a significant amount of revenue or managing key supplier relationships.
• But the absence of a key person because of a temporary disability can place a business under the same level of stress that occurs in the event of death or permanent disability of a team member.

The big question

So what happens when a business loses an owner or key person either temporarily or permanently? What happens if you don't have a plan in place?

Day 1 – The Shock Event

Firstly the business revenue is now at risk and a projection of how long this can be sustained needs to be done.

• How much free cash does the business have to draw upon?
• How long can the fixed overhead costs (like rent, utilities, and wages) continue to be paid?
• If we’re renting commercial premises, are we risking a lockout after 90 days if rent is not paid?
• How long will the equipment leases continue when repayments are delayed or not made?
• How long will suppliers wait to be paid before the repayment delay triggers a forced review of credit terms?
• What do we tell the staff, the suppliers, and the customers, and when?

Day 5 - How long is a piece of string?

If the business owner or key person is disabled, what’s the likelihood of them returning to work, and what are the plans to replace them if it’s a long-term illness or if they pass away?

Day 9 - Are the owners' personal assets at risk?

How many directors guarantees have been signed that tie the homes and personal assets of the company directors to the business debts? Will the business need to call in loans made to its company directors or ask them to contribute more of their personal wealth while its future is uncertain?

Day 15 - When the banks get concerned

Most commercial credit is provided on terms at call in 7 to 30 days. This means a funder can revoke and call up the credit facility in 7 to 30 days if they so decide. Upon learning of your significant business risks they will probably freeze your credit, increase your interest rate or call in your commercial loans. Many commercial loan contracts require you to report the disability or death of an owner or key person.

Sound harsh? Funders expect you’ve also taken a commercial approach and have sufficient saleable assets or key-person insurance in place to protect your business from these known predictable business events.

Day 18 – When do you consider selling assets to meet your debts?

If you sell off the income-producing assets, it’s like selling the truck that delivers your product (or cooking the goose that lays the golden egg). For most small businesses, these options are simply not possible. Having insurance cover in place often represents the only commercially viable solution for small businesses.

Day 20 - If you’ve lost a key staff member when do you start to recruit?

How long can a team member's position stay vacant before it impacts your commercial survival? If you need to recruit, what’s the lag time before you find a replacement, train, and bring them up to speed? If your company is not financially stable, there’s a risk the best talent may not want to join a company to replace a missing team member if its longer-term viability is compromised.

Pro Tip: A temporary disability is statistically more likely to occur than a permanent disability or death. A temporary disability could be from any cause, including a physical injury, early-stage cancer, a minor heart attack, or stroke.

Day 25 - Employees begin to look elsewhere

Without a backup plan and adequate funding in place to implement it, staff, fearing the worst, begin to look elsewhere for employment. During this time it’s not unusual for a business to experience higher levels of sick leave and disengagement from staff.

Day 40 – The news is out

• New customers become uncomfortable about your ability to deliver and may delay or abandon working with you.
• Your suppliers may choose not to extend credit and now require upfront payments or at least shorter payments terms.
• Existing customers who learn about the business interruption may delay or stop paying bills further straining cash flow.
• Competitors will seek to take advantage of your cash flow restrictions, may aggressively market against you, approach your suppliers or even seek to buy out the shares of a deceased co-owner at a fire sale price.

What’s the alternative?

Start building a backup plan today that answers these two questions;

1. What will happen if you suffer a business interruption due to the death or disability of an owner or a key person; and
2. How will this plan be funded?

Retain or Transfer your business risks

Selling off income-producing assets, wishing for more bank funding, or asking suppliers to extend the credit terms while hoping to ride out a difficult situation, means your business retains the risk and your family ultimately pays the cost.

The last word

Alternatively, you can transfer the full cost of managing this risk to an insurance company.

This way your business can receive a significant cash injection to help it continue to trade, if necessary recruit and replace and be able to tell its owners, families, staff, and suppliers ‘there’s a plan in place and its business as usual.