March 2011 Business Assurance – an overview by FPC Corporate Solutions Media Briefing Date: 28 June 2011

Somerset Morkel Wealth Management Consultant Industry experience  October 1982 – Financial Adviser with Trust Bank  June 1983 – Independent Financial Advisory practice  Sold Practice in 2005 – spent time in UK in financial services  Mar 2009 – Joined Alexander Forbes FPC Qualifications: BSc (Wits) HDipEd CFP Introduction

What is the purpose of Business Assurance? “Business Assurance aims to minimise, limit or extinguish visible or hidden risks that an Entrepreneur or his Business is directly or indirectly exposed to both now and in the future.”

Why is Alexander Forbes looking at the Entrepreneurial / SME space?  SMEs – the lifeblood of the SA economy  Over 500,000 businesses operating as SMEs  Approximately 2.5m people working on their own or with a partner  Accounts for about 30% of total GDP Source: Department of Trade and Industry, Annual Review of Small Business in South Africa, 2007  FPC Corporate Solutions recognises the importance of this sector. Advice includes:  Exposing business risks / highlighting solutions  Separating business from personal needs  Understanding the relationship between the two  Success and continuity of the business will depend on the entrepreneur understanding the risks he/she faces

Psyche of the entrepreneur  Confident, focused and motivated  Very aware of costs  Needing “big-picture” solutions, but understands that “the devil is in the detail”  Usually a close relationship with their financial director, accountant or auditor – financial adviser must be able to speak same language  Protection of family essential to them:  Estate planning and family protection  Drafting of the last will and testament  Retirement planning outside the business

Business entities: Company Close Corporation Partnership Incorporated Company Section 21 Company Family Trust Business Trust Sole Proprietor

Parties to a contract Owners: Natural Persons Business Entities Lives Assured: Natural Persons Beneficiaries: Natural Persons Business Entities Premium Payers: Natural Persons Business Entities

Owners Business EntityEmployees Business Continuity Income Replacement Suretyship Protection Loan Account Redemption Debt Consolidation Business Overheads Cover Key-person Cover Loan Account Protection Alternative Financing Retention Incentives Retirement Provision Income protection Medical Aid Group Life Asset Replacement Capital ExtractionDebtor’s Cover Medical pre-funder Short-Term Matrix of business needs Owners

Business Continuity, Keyperson and Suretyship Protection

Business continuity (Buy and Sell) Succession Planning - The Last Will and Testament of the Business What will happen to the business on the death or disability of an owner? Is there a Buy-and-Sell Agreement in place; when was it last reviewed; is the agreement correctly structured? Is the method of funding for the purchase of the shares sufficient and correctly structured? What is the value of the business? What valuation method was used to establish this value?

Business continuity policy structure Structure of Buy-and-Sell policies for a company with 5 shareholders  Owner: Owner A, B, C & D  Life Assured: Owner E  Premium Payer: Owner A, B, C & D Usually the company pays the premium and allocates it to A, B, C and D’s loan accounts or debits it to their salaries. NB: the owners MUST pay the premiums in proportion to their shareholdings. No premium must ever be paid by the life assured.  Beneficiary: Owner A, B, C & D (this is not usually stipulated, as the proceeds will be paid to the owners)

Keyperson cover  Who are the key individuals in the business?  What are the business owner’s options if a Keyperson should die or become disabled?  Associated cost of replacing a key individual  Recruitment agency fee (20% - 25% of annual salary)  Cost of training and up-skilling  Possible increase in salary/CTC  Course fees and other external costs  Cost of the golden carrot  Relocation allowance  Loss of income

Keyperson policy structure Funding Structure via a Life Policy  Owner: Business Entity  Life Assured: Keyperson  Premium Payer: Business Entity  Beneficiary: Business Entity Important: Premiums deducted or not? Assurance payout taxable or untaxed

Suretyship protection  Many small company balance sheets are not sufficiently strong to satisfy an institution lending the company money  The individual (or individuals) is requested to stand personal surety for the loan or funds borrowed by the business.  What happens if the business cannot repay the loan?  By extension, what happens if, on the death or disability of the person who stood surety, the business cannot repay the loan?  Are the shareholders aware of the “benefit of excussion”?  Is there an agreement in place and was a resolution passed?

Suretyship protection policy structure Funding Structure via a Life Policy  Owner: Business Entity  Life Assured: Person who stood Surety  Premium Payer: Business Entity  Beneficiary: Business Entity  Cessionary: Bank/Financial Institution Important: Premiums deducted or not? Assurance payout taxable or untaxed

What the entrepreneur should be looking for in a business solution Ideas must be rooted in methodical research, with the outcomes resulting from tried and tested implementation Deal with a team with the requisite specialist skills, but make certain there is sufficient backup to give ongoing peace of mind Make certain that the bar on compliance is raised to the highest level – the advice you get must be scrutinised and evaluated by legal and compliance teams Protection – there is always some implementation and product risk when setting up risk or investment plans. Make certain that the advisor you deal with carries significant professional indemnity cover

Thank you for the opportunity. Any questions?