Charles Seguin, CA, is partner-in-charge of the PricewaterhouseCoopersLLP Automotive Retail Practice. The cross-Canada practice focuses on retailer growth and development, operations improvements, succession planning, acquisitions and divestiture, accounting, tax and finance-related issues. He can be reached via e-mail at email@example.com
Luanna McGowan, LLB, is partner-in-charge of the PricewaterhouseCoopersLLP Centre for Entrepreneurs and Family Business. The centre provides facilitation, strategic planning, retirement planning and wealth management services to entrepreneurs and organisations. She can be reached via e-mail at luanna.mcgowan@ca. pwcglobal.com.
e all operate our daily lives in a busy, hectic society, where unforeseen events permanently change lives at random.
For the entrepreneur who owns his own business and is key in its day-to-day operations, such an untimely event can cause serious damage to that business and that entrepreneur’s personal financial situation.
Meet John and Mary Smith (not their real names).
John, 49, owned a parts wholesale operation that employed seven people including Mary, 50, his wife of 20 years, and a partner, aged 61. They have four children aged nine to 18, three daughters and one son.
The eldest daughter was due to start university this fall, but last December 12 John and Mary were involved in a serious car accident. John spent 21 days in intensive care as a result of an acquired brain injury from the accident. His wife Mary received non-life threatening injuries. Her injuries however were serious enough to cause her to be unable to return to work for at least 12 months. The doctors estimate that John will need two years of rehabilitation and that he may never be able to return to work.
Prior to the accident, their net family income was approximately $8,000 per month after tax. The disability coverage, however, only amounts to $4,200 per month, resulting in a shortfall of $3,800 per month. On top of this, the company saw an immediate 25% reduction in revenue. The operating line of credit with the bank quickly was at its maximum level and the bank froze the credit facility. John and Mary’s personal assets secured the business loan. The business was sold to the partner a couple of months ago for well below market value, as part of a personal debt reduction strategy and to repay the bank financing outstanding.
John and Mary have been drawing on their RRSPs monthly since the accident in order to meet living expenses. Their daughter has postponed her plans to attend university.
Unfortunately this story is true. Also the unfortunate part is that with proper contingency planning, John and Mary could be in a very different position today.
What could they have done?
Statistically, an individual is 10 times more likely to become disabled than die during his working life. This raises the issue of insurance.
John and Mary had purchased their disability policy 11 years ago, when the coverage was more than adequate to meet their family needs. Had they reviewed the policy coverage annually and had it increased as their actual cost of living increased, the policy would have compensated them at current spending limits. They also chose to purchase a private plan as opposed to a group plan. Group plan coverage would be tied to current salary levels and would have protected John and Mary well beyond their private coverage at much lower annual rates.
John and Mary also did not subscribe to optional car insurance coverage provided by their automobile insurer. As a result, their cumulative lifetime insurance coverage for rehabilitation support is capped at $100,000. For an additional premium of approximately $100 per year, this coverage could have been increased to $1,200,000.
John and his partner did not have a shareholders agreement, and as such there was no buy-sell agreement. Typically, shareholder agreements provide for a formula for compensation if disability occurs and also provides a formula for valuing the business for purposes of transactions between shareholders. Had a buy-sell or shareholders agreement been executed, John would have received considerably more from his partner or a 3rd party on the sale of the business.
John was the key manager in the business and the source of most customer contact on key accounts for the business. John could have introduced his partner or another key employee into the accounts critical to the business to ensure that the revenue of the business continued uninterrupted as a result of an unforeseen event.
EDUCATION SAVINGS PLAN
Had John and Mary contributed to an education savings plan when the children were young, the funds would be available, at least partially, to fund post-secondary education for their children. A regular systematic education savings contribution of even $100 per month would yield a great jump start for their children’s post-secondary education.
The John and Mary story is a sad one. With a little planning their current hardship could have been avoided or at least significantly minimized. John and Mary are not alone. Many independent business people are running the same risks, risks that can and should be avoided. Accidents can happen to anyone at anytime.