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How Will You Maintain Your Business If You Can’t Work Due to A Serious Injury or Illness?

The vast majority of people grossly under-estimate the likelihood they will suffer a significant disability that prevents them from working. In fact, the probability that a person will become disabled for three months or longer is a little over 25%. These probabilities increase significantly if a person is overweight, smokes, or has extant chronic illnesses such as diabetes, high blood pressure, and/or heart disease. It also depends on occupation: typically, physically demanding jobs present a higher risk than sedentary ones. However, disability due to illness is generally not career sensitive: for example, cancer does not care if you sit behind a desk of work in construction.

Fortunately, many people have disability insurance through their employer, so if they were unable to work for an extended period, a portion of their income would be covered, although there are often gaps in this coverage and will be covered in another article. But self-employed business people, especially those who’s expertise is the financial lifeblood of their organization, such as physicians, dentists, attorneys, consultants, have two problems if they are disabled: one, replacing their lost income while they cannot work, and second, keeping their business viable during their recovery. It is this second issue that I will cover in this article, since financials advisors and insurance agents rarely address it. The type of insurance that helps maintain a business while the primary revenue generator is convalescing is called Business Overhead Expense (BOE) Disability Insurance (DI), or Business Expense Insurance (BEI). For the sake of brevity, I will use BOE, as this is the most common initialism in the industry.

Sole proprietors and small groups of professionals are especially susceptible to complete or partial revenue loss when the primary revenue generator cannot work for an extended period. For example, a physician or dentist who is a sole practitioner has a huge financial exposure in the event he or she is disabled for an extended period, as that single person generates the entire practice’s revenue. In engineering parlance, the sole practitioner is a single point of failure in the business. If the likelihood of an extended disability is one chance in four, then the financial risk to the practice is the same. A business owner in this situation has to ask, “Is this financial exposure something I am willing to assume without a risk mitigation plan in place?” Let’s look at this another way. Would you assume a huge financial risk if you had a 25% probability of losing everything?

BOE typically covers the recurring expenses from your business or practice. These are the expenses that keep your business going even if you are disabled and cannot produce a revenue stream. Typically, BOE insurance covers a maximum of two years of disability, and can have elimination periods of 30 60, or 90 days, depending on how much reserve the business owner has and the premium he or she can afford.

BOE covers many of the expenses normally incurred by businesses, but only pays actual expenses, up to the maximum amount of the policy’s monthly benefit. The expenses typically covered by BOE include:

  • Rent
  • Interest payments on some business debts
  • Utilities
  • Employees’ salaries and payroll taxes
  • Postage and stationery
  • Equipment maintenance
  • Rental, lease, or depreciation of office equipment
  • Taxes on the business property location
  • Insurance premiums for Workers’ Compensation, employee medical, and liability
  • Accounting fees
  • Professional memberships and subscriptions.

As important as all of these are, I contend the ability to pay salary and benefits to your employees is a business owner’s priority. The inability to pay salaries leaves your staff-whether one or several people-with no way to cover their own expenses and forces them to seek new employment. And when the business owner returns from their convalescence, they are now faced with additional burden of hiring and training a new staff. This alone adds to expense and can result in decreased revenue during the ramp-up time. Additionally, business owners feel a sense of obligation to protect their employees from unforeseen circumstances: if they can’t, they feel they have not fulfilled an implicit moral agreement with them.

The tax consequences of BOE are also quite interesting. The premiums are generally considered a tax-deductible business expense, with any benefits treated as taxable income. However, because the covered business expenses are typically tax deductible, they can be subtracted from the benefits that are paid out when filing. Since the benefit only covers actual expenses, the business expense deductions should result in a zero net income to the business during this time, with no taxes owed. An accountant should be consulted for more details pertaining to this issue.

Premiums for BOE are calculated based on the same underwriting criteria as any disability policy: the age of the insured, occupation, and health. Bear in mind, there are situations where an insurance company cannot underwrite a BOE policy due to unfavorable ratings resulting from any one or combination of these factors, so there is no guaranty that a policy can be issued. Many insurance agents write policies with multiple companies, so they should be able to shop for the best alternative for their client.

There is one more important point to consider. If a business is a small partnership, it important to consider writing BOE policies on all of the partners, since the loss of any one of them will have a dramatic impact on the organization’s revenue stream during their absence. The policy benefits can be adjusted to reflect the impact of the loss of one partner or the simultaneous disability of multiple partners.

BOE is an extremely important part of a business’ contingency planning. It helps mitigate the high risk that business income will be disrupted due to the incapacity of the owner or owners, and allows the business’s expenses to be paid during the this time. It also protects the interest of employees by providing the ability to pay their salary and benefits if there is no business revenue. Finally, the premiums are tax-deductible, which can lower the business’ tax liability. Most importantly, BOE provides an a tremendous level of emotional security to business owners who are often only a few weeks away from not having the money to continue their business in the event a disability occurs.

Why 2014 May Be The Perfect Year To Sell Your Business

In the entrepreneurial ecosystem, business owners looking for an exit strategy are likely to find 2014 an optimal year for selling.- Peter Lehrman, Entrepreneur Magazine

Timing any market is always a tricky proposition, especially in this era of diminishing returns and lowered expectations. The market for selling a small to mid-sized business is no exception.

Anyone considering selling a business, especially boomer business owners thinking about retirement, should have a list of compelling reasons why they want to sell and a plan to help them do so.

For most business owners, the timing will never be perfect, so waiting until the ideal moment to sell could be an impractical course of action. However, certain indicators are pointing to a better than average success rate for selling a business in 2014.

That’s why it’s a good idea to employ strategies right now that will help you get the maximum money for your business.

2014: The “Year of The Seller?”

Three or four years of turmoil in a struggling economy makes some business owners understandably cautious when it comes to optimistic projections for 2014. However, there are some very good indicators pointing to the possibility of a perfect selling environment for at least the next 18 months or so.

For example:

• The majority of businesses have experienced increased profitability for the past 2-3 years.

For numerous business owners, 2008-2010 were flat as far as profits were concerned. Those who survived this period felt lucky to break even, much less put profits on the books. With demand down across the country for services and solutions, business owners were unhappily treading water.

However, the recession is slowly retreating, allowing businesses to recover. Many are now in a position to show the three or four years of solid growth that qualified buyers want to see when they build projection models.

The ability for a company to demonstrate upward trends in their financials shows prospective buyers that it is right to make positive projections for future growth. This in turn gives owners better valuations and does wonders to make the deal viable. Buyers want to know that a business they purchase is poised to survive even a serious economic downturn.

• Low interest rates (for a little while longer, anyway)

You don’t have to have an advanced degree in economics to understand that the artificially maintained low interest rates we now experience will soon be a thing of the past. Forecasters have been fretting that the Federal Reserve will be forced to curtail its’ bond-buying program soon.

A growing number of experts now say that 2014 could be the year when that finally occurs. This means, naturally, that waiting too long to sell might mean an owner will see higher interest rates and a lower price for his or her business.

The reason for this is that interest rates always have a direct impact on the price of capital used to purchase a company. Buyers who rely on loans to acquire a business will feel the sting of these rising rates since earnings are used to pay the interest on loans. An increase in the price of capital will almost certainly lead to lower valuations for businesses.

It makes sense that the more expensive it is for buyers to get capital, the less willing they are to pay top price for a business. As soon as rates begin to rise in 2014, there will be a negative impact on business valuations.

• Low levels of debt and lots of positive cash flow

Credit Suisse reported in February, 2014 that 73 percent of U.S. companies and 56 percent of European companies have incredibly low levels of debt on their balance sheets compared to their total market capitalization.

Private equity companies are awash in cash, with nearly $1.1 TRILLION in cash on hand. At the same time, levels of corporate debt are falling to new lows. So, what does this mean for you as a business owner who is seriously considering selling?

Well, for one thing, since all this cash needs to go someplace other than under the CEO’s mattress, private buying groups will be out en masse looking for successful businesses they can buy and from which they can see immediate cash flow.

For another thing, there is a natural mood elevation that goes on when so many dollars are in play.The old saying “a rising tide lifts all boats” is applicable here. Every billion dollar mega-deal that goes down makes every smaller business deal more attractive. Small businesses are sure to benefit from the optimism that comes with any boom.

• Changing demographics are pushing boomers to sell.

The first half of the “Baby Boomer bubble” (2005-2010) has passed. During that period, older Boomers were able to sell to younger boomers, although the success rate was still a mere 3%.

However recent research indicates that the number of boomer owners indicating they wanted to retire increased from 50,000 in 2001 to over 750,000 in 2009.

It is possible we could see over one million businesses go on the market in the next 10-15 years in a transition tsunami. If this holds true, then it makes sense to sell ahead of the herd and reap the benefits of the current buying frenzy fueled by low debt levels and loads of cash.

Even if you think you aren’t ready to leave your business yet, you should plan as if you are. Positioning your business to sell is never a bad idea or waste of time.

By crafting a well-thought-out exit plan, you will be prepared if circumstances (either good or bad) push you to sell, or if you get an offer from a qualified buyer that you just can’t afford to pass up.

You never know, maybe 2014 will be the year you make a profitable transition from your business and start enjoying everything for which you’ve worked so hard.

The New Role of the CIO – Business Transformation Partner

It is becoming increasingly necessary for Industries and Organizations to improve Productivity, Reliability and keep pace with the ever increasing demands. Never before has there been such a pressure on Business-the Production and Engineering departments to keep up to these demands.

Business has no other choice but to identify “issues”, adapt “new technologies”, de-bottleneck and implement Engineering/Process IT Innovation drives wherever practical and possible.

Information Technology is not the business, it is an enabler. By enabling the business, the IT strategy, architecture and projects should be dictated by the larger Organization business strategy, architecture and programs. However, we often see a Disconnect between the IT and Business Strategy.

The IT strategy

The CIO or the Chief Information Officer can play the role of a partner and assist the Business team achieve their objectives.

IT is perceived as not providing value to the organization. Why is this?

Typically the CIO and the IT team’s role have been restricted to Implementation, ‘Support’ & ‘Maintenance‘ of Enterprise needs related to IT hardware and Software.

IT teams have in the past procured specific software and hardware, have got tied down by the lock in periods, typically three to four and have eventually got trapped with the obsolete software down the line.

The advent of the Cloud, Platform as a Service, Infrastructure as a Service & Software as a Service has provided the CIO with new possibilities.

Technology trends and landscapes are much more dynamic now and there is an increasing need for CIO’s to look at getting out of the ‘traditional support‘ mode and get more focused on meeting the ever increasing demands from Business.

The Organization now increasingly looks at the CIO for critical support to the Business teams, without which no Transformations would be possible.

A Proactive CIO is the one that sees the cue and takes the lead in these transformational initiatives that can make a big difference to the way the Organization performs.

Most CIO’s of Organizations report to the CFO, I am not sure if this is the right structure. However a smart CIO can take advantage of this structure and ensure that they have the blessings of the CFO to allocate good Budgets to IT and Process and Engineering IT initiatives.

Having said that in today’s recessionary times, these Budget allocations are not easy. A lot is expected to be achieved with a reduced budget and in least time.

Also several IT initiatives related to Business improvements in the past have not been successful, mainly because the CIO and the IT teams has never been considered as a reliable partner to implement and be responsible for such Initiatives and its Implementation.

How can the CIO and his team become a trusted Business partner and how do they first ensure these Budget allocations? How would they get the Management Support and backing?

-A Business Transformation programme

The first phase would necessitate the hiring of a Business Process Improvement Consultant who would on a fast track, identify issues across the Business units, recommend Areas of Improvement.

{We will not get into details here about the way the programme is to be managed}

The Consultant should ideally be asked to recommend a short list of areas of improvement, those which can provide the Organization with the maximum Impact.

-An Innovation drive

There is no point in diluting the efforts of Innovation by identifying far too many areas for innovation and improvement as mentioned earlier.

This should be Targeted and only those Innovations that can meet the new Business needs and challenges must be taken up.

The following would be KEY to the success of these IT Innovation drives.

-Branding Campaign

A precursor to the Innovation project should be a well designed and branded campaign.

This campaigns only objective is to sell this idea within the Business and to ensure that the entire Business team realizes the value of this programme and the Business Outcomes that it is designed to achieve

-THe Right Technology

Identify a tested and proven Technology. It’s a good idea to make site visits to organizations that have implemented these Technologies successfully and get a good feedback

-The Right Leader & Right team

The leader should ideally be CIO who shares the Business & the Organization’s vision. He should be assisted by a Business Leader. The need for small focused teams comprising Leads from IT and Business is absolutely necessary. The right leader needs to assist and lead the team and justify to the Core team, the need for these innovation drives and the resultant Business Outcomes.

-Right Partner to Implement

Identification of the Right partner to implement is another Key need and ideally the selected product or the technology OE is the right agency to recommend the partner.

-The Right Methodology, Framework

It’s very important to ensure the right methodology which ensures consistent internal stakeholder support. How do we manage this?

The idea is to break up these projects in phases and into small projects rather than go with a Big bang approach.

Create small POC’s, demonstrate small success stories.

The best way to show proof of success of typical process Automation or other IT Innovation drives is to get the ‘Business users’ to see and measure success-the best way is to implement a POC, develop a small self service portal, where they are able to key in specific data and see tangible benefits.

Unless the Business Users ‘do not perceive‘ this as an Experiment and a Risk, the project will not meet its objectives.

If this is achieved, not only the Roll Outs of the project is guaranteed but also in the least time and well within the reduced Budgets.

Lessons Learnt

The CIO must make these success stories visible to his Organization at the right times during the project progress. The objective must be to ensure that the rest of the Organization and key stake holders are confident about the success and supports him and the Business teams.

Change is always resisted; people get complacent and comfortable doing things the old way. It’s important for them to experience the Changes Innovation brings and how it lets them achieve their Objectives better and more efficiently.

Smart CIO’s are the ones that are looking to ’outsource’ routine and Typical Support and gearing up to meet the new Business Challenges.

The role of the new age CIO is to lead from the front and move from typical “Supporting” the Business to ”Contributing” to Business through a string of IT and Engineering/Process IT Innovation drives that transforms the Business.