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The success of a business often depends on the personal services of key
employees (key men). The loss of a key employee's services due to death or
disability will usually result in financial losses to a business, which include
those:
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Resulting from errors of judgment committed by less competent
replacements
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Resulting from dissipation of good will
and business connections
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That damage the company's credit standing
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Through competition
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Incurred in hiring and training
replacements
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Caused by low morale of remaining
employees
If you are a business owner, protecting your business interest from the
financial loss of a key employee is a critical issue you do not want to
over-look in wealth preservation.
The Best Solution for Key
Employee Loss
In an ideal world, the best solution would be to immediately find an
equally competent replacement for the same compensation package. But
the question is, "Is this realistic?" Of course not! In the real world,
the real solution to the problem is to have timely cash to do the
following:
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Sustain the company when income decreases
and expenses increase
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Liquidate loans and outstanding financial
obligations
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Maintain the ability to settle bills,
salaries and other expenses so that employees, customers and suppliers
are convinced that the business is continuing
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Recruit and train a suitable replacement
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Cover the cost of mistakes made by the
replacement when he starts on the job
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Provide gratuity benefits to the
deceased's family
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Assure suppliers and creditors of
payments
Alternatives for Timely Cash
The following are several funding sources to address the loss of a key
employee:
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Company's reserve fund.
The question is whether the company has enough time to build up the
necessary amount. Even so, the cost of funding is 100 cents to $1
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Current profit.
The question is whether it is prudent to rely on the uncertain amount
of profit. Even so, the cost of funding is still 100 cents to $1
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Borrowings.
The question is whether it is good to get a new loan when the company
has just lost a key employee. Even so, who would be keen to lend money
to a company that has just lost a key employee? Furthermore,
the cost of funding is 100 cents plus interest on borrowing
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Key man life insurance.
The question is whether the key employee
is insurable. This solution provides the opportunity to pay $1 at a
discount.
Because the loss of a key employee results in significant losses to a
business, your wealth preservation planning would not be complete if
this issue is not appropriately addressed. So, place a value on your
key employees, then identify the proper funding for timely cash in the
event of key employee loss.
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