For entrepreneurs in general, risk is a familiar concept. When doing business, company owners need to manage their reputational risk, credit risk, cyber risk, investment risk, and foreign exchange risk, to name a few.
But one type in particular is often overlooked: that related to the future health of a business owner and his or her partners or key employees.
An overlooked factor
A study done in France a few years ago concluded that entrepreneurs are generally well aware of the financial risks associated with their business ventures, but much less so of the non-financial risks. Barely one in four respondents said that they had taken the time to assess these, especially the risk related to the entrepreneur’s own health.
A business venture can both create health risks for the entrepreneur – stress, for instance – and be the first collateral victim when such risks materialize.
Understanding health risk
According to Statistics Canada, one in three Canadians will have a disability period longer than 90 days during their lifetime, and the average disability period would be close to three years. Recently, a number of studies also revealed the increasing toll that the pandemic has been taking on the health of entrepreneurs. One California study even estimated that tech entrepreneurs, for example, were 50% more likely than the average person to develop mental health problems.
Which raises the question: what happens when the physical or mental health of an entrepreneur, partner or key employee breaks down to the point where the person is no longer able to work?
This situation could create a number of serious concerns:
• to begin with, the person might be deprived of income if the company could no longer continue to pay them;
• next, the company could be forced to carry on without this essential resource, and corporate earnings could suffer;
• to compensate, the company might have to do some unplanned hiring;
• clients might terminate their business relationships; and
• creditors might ask the company for additional collateral; the company’s ability to access credit might become limited.
As we can see, it wouldn’t take much for a critical illness or disability to spark a crisis.
Managing health risk
There are a variety of ways that an entrepreneur might take control of his or her health risk. Here are the main ones:
• Mitigate the risk
No one is immune to misfortune, but entrepreneurs are often inclined to impose especially harsh living conditions on themselves. That’s why the first recommendation made by management consultants is often behavioural: to create some balance between the professional, financial, familial, social and even spiritual dimensions of life in order to mitigate the impact of work-related pressure on the health of the owner, partners and key employees.
• Acquire a sound insurance portfolio
Three types of coverage are generally sought in case of disability: overhead protection, key resource protection and receivables protection.
The relevant insurance solutions may take different forms, the two main ones being critical illness insurance and disability insurance. The common principle is the same, however: to provide a source of cash, sometimes tax free, to enable both the company and the individual to cope with the situation and avoid a financial crisis. An interesting feature of some critical illness policies is that when the insured remains healthy there may be a return of premiums to the policyholder.
Depending on the corporate structure, there could be several advantages to having some of these insurance policies held by the company, or even the entrepreneur’s holding company, instead of the individual. In this case, however, the portion of the benefit going to the individual probably wouldn’t be tax free. It may therefore be worthwhile to sit down with a financial security advisor to thoroughly evaluate each approach.
• Set up a good shareholder agreement
In the case of a company that is co-owned by several partners, the shareholder agreement could also help to manage the situation smoothly. Among other things, this type of agreement sets out the rights and obligations of the shareholders and the company in the case of certain events occurring – particularly if one of the partners becomes disabled or dies. For example, the agreement could ensure the existence of a market should the partner or his/her successors need to dispose of their shares, and set the terms for redemption and payment.
As we can see, health risk, like all other business risks, could easily be managed – as long as you have the right tools. If you would like to evaluate whether certain types of coverage would be appropriate for you and your company, don’t hesitate to consult your independent advisor.
The following sources were used to prepare this article:
Conseiller, “Financement des clauses d’invalidité et décès dans une convention entre actionnaires.”
Finance et investissement, “L’assurance de prendre son temps.”
Harvard Business Review, “Covid-19 : quand la menace n’est plus seulement sanitaire.”
Les Affaires, “Guide de survie pour l'entrepreneur en cas d'invalidité“; “Troubles de santé mentale: les entrepreneurs sont-ils plus à risque ?.”
OpinionWay, “Baromètre de la prise de risque des entrepreneurs et indépendants.”
Raymond Chabot Grant Thornton, “How are you? That’s what all entrepreneurs should be asking themselves.”
Réseau juridique du Québec, “La convention entre actionnaires.”