As a small business owner you are likely to be the core of your business. So what happens if you are unable to work for any extended period due to illness or injury?

This is probably an issue you raise and solve for clients, but have you thought through your own business implications? Now is the optimal time to put in place a survival action plan for your business.

The implications
Consider the implications if you are unable to work for a period of time. What would happen to your business revenue? How would you manage expenses? Would your expenses increase during this time? Would your business survive?

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Not being prepared may create financial difficulties for your business but it is not only your business that would suffer.

The implications can be divided into three categories, as shown in Chart 1.

Think through the issues for each category so you can develop and implement a survival action plan.

It is also important to recognise that the issues will not have an impact on the relevant category in isolation but will create a flow-on effect to each of the other two categories.

Your business
As a key person in your business you need to consider how your absence would affect revenue and management of the continued operations.
It is important to ensure the business remains viable and profitable during this period so that you either have a business to come back to or you have an asset to sell.

If you have business partners, the ability to sell should be covered under a buy/sell agreement with a funding arrangement such as personal life insurance. However, if you are a sole trader or sole shareholder/unitholder of the operating entity you may need to sell your business on the open market – with the price determined by ongoing viability, retention of clients and profitability.

• If you have business partners, ensure you have a buy/sell agreement in place which is matched to an appropriate funding mechanism, such as insurance on each business owner’s life
• Consider business expenses insurance to reimburse fixed business expenses for up to 12 months
• Consider key person insurance on your life to provide a capital pool to keep your business running until you can either return to work or arrange a restructure or sale.


Your family
A decrease in business revenue may lead to reduced income available to your family to meet ongoing expenses and lifestyle needs, not to mention to fund any healthcare needs you may have. In addition, family income may need to be directed to meeting business expenses rather than personal needs. This can all place further financial stress on your family.

• The insurance protections for your business can reduce the financial stress on your family by minimising the need for family resources to be redirected to the business
• Consider your own personal insurance needs for death, total and permanent disability, trauma and income protection as well as healthcare to ensure your family has adequate income and does not add to business pressure by drawing on profits.


Your retirement savings
Many small business owners tend to reinvest in their businesses (at the expense of building superannuation savings) with the view that the business is a growing asset that can be ultimately sold to fund superannuation contributions using the small business capital gains tax cap.

If your business fails, however, not only do you lose your current income stream but it is likely that you will lose a significant portion, if not all, of this potential retirement savings. Even if the business does not go into bankruptcy, a sale in a period of financial distress could result in a significantly diminished sale value.

Under bankruptcy, your superannuation savings are protected, but only if the contributions were made on a regular basis as genuine superannuation savings and not just to remove assets from the reach of creditors.

• Make regular contributions to superannuation to establish a contribution pattern for bankruptcy protection
• Consider income protection that also pays your ongoing contributions into superannuation to keep superannuation balances growing
• Ensure your business as well as your family’s income and assets are adequately protected so you do not direct wealth away from retirement-planning strategies and you continue to have an asset to sell.


The decision-making process
A well-designed survival action plan may become difficult to implement if your illness or injury leaves you incapable of making your own financial decisions or managing your personal affairs.

Make sure you also implement or review your will, enduring power of attorney, enduring power of guardianship and advance care directive.

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