PREVIOUS CHAPTER

CHAPTER 11 Protect Thyself

NEXT CHAPTER

What do we mean by "protection?" Protection includes those steps we should take to ensure continuity of business operations in the event of unforeseen problems. It also includes protecting your personal assets from business creditors in the event of a business problem.

Part of owning and operating a business includes being fully aware of the potential liabilities that may result from any number of situations, such as selling a product to someone who is subsequently injured by it; being sued by a customer or business associate; or damage to your facility. The list is endless and the watchword is "awareness." Once aware of the potential problems, you can take steps to limit your liability and business disruption in the event of an unforeseen circumstance. Keep in mind that as a practical matter, you can only limit your liability, not reduce it to zero. You must take steps to keep your potential liability at acceptable limits. That is, how much can you afford to lose without becoming "insurance poor" (buying too much insurance).

Protection includes the following major elements:

• Choosing the most suitable business legal structure.
• Obtaining legal advice when required.
• Fully understanding personal guarantees.
• Using credit bureaus.
• Developing an insurance program.

The various business legal structures are explained in Chapter 3. They range from the sole proprietorship to various forms of the corporation. As we said earlier, it is difficult to give specific advice as to what is best for you. Take the time necessary to understand the various advantages and disadvantages of each business legal structure. The legal structure you choose relates directly to your potential personal liability and, therefore, to your insurance program. Always consider your personal exposure when selecting your legal structure.

LEGAL ADVICE

We discussed the need for legal advice in Chapter 6. What needs to be stressed again at this point, is that protection starts with appropriate legal advice on any and all contractual matters relating to your business. Review Chapter 6.

Don't take any chances. In the legal world, after the fact is nearly always too late. With legal matters, don't be penny wise and pound foolish! Business legal problems can sneak up on you and you must be ready. You get ready by having your attorney review contracts and other business documents before signing them. DON'T be pressured by time constraints or the excitement of the moment!

TRUISM 22
A personal guarantee is never a problem at the time you sign it.

Don's business was going well. He had an opportunity for a large purchase order with a company many times his size. The order was straightforward, indicating a delivery date for manufactured items at a stated unit cost. Don was excited ... the order was the largest he had ever received and, in his haste, he immediately acknowledged the purchase order and set to work. Unfortunately he had not reviewed the BACK of the purchase order which listed "conditions of sale" in about this size type. Don's major supplier was tardy with materials which, in turn, made his delivery late. The customer refused to accept delivery! The "fine print" made it clear that late deliveries would not be accepted. Too bad.

PERSONAL GUARANTEES

The best advice here is think twice and then think again! With a personal guarantee, you are liable for the guaranteed amount regardless of your business legal structure. Personal guarantees are usually executed when business is going well so one tends not to think of the downside.

Do not EVER sign a personal guarantee on the spot. Have the guarantee reviewed by your attorney ... these documents can be onerous. Review the guarantee considering the worst-case scenario. It may be difficult to think worst case when all is going well but you must assess from this perspective.

Kathy signed a personal guarantee for a com-mercial lease to be used by her incorporated business. The leasing company required the guarantee because the business did not have adequate assets. No big deal, Kathy thought. It was a 5-year lease and the guarantee only covered the first year at the full yearly lease value. Thereafter it decreased to a fraction of this value. Her business was expanding and she needed the space now. All was going well. One year later disaster struck and the corporation went into bankruptcy. Kathy was now personally responsible for the remainder of the lease AND (as noted in the fine print in the lease) the cost to rebuild the space for the next leaseholder.

With personal guarantees (and indeed, anything you are considering signing), recall the advice of H. Jackson Brown, Jr., in his "Life's Little Instruction Book" in which he notes, "Read carefully anything that requires your signature. Remember the big print giveth and the small print taketh away." CREDIT BUREAUS

It might seem strange to consider protection from your customers but the fact is, while your customers are one of your greatest assets, they are also your biggest potential problem makers. Good relationships can turn bad overnight. If your customers are other businesses, they can have problems, too.

When you contract with a customer you need to maximize your chances of getting paid for your efforts. Since most businesses are not cash-based, you will be forced to provide credit terms to be competitive. You should always ask for credit references. However, rest assured that your potential customer would not knowingly give you a "bad" reference. You need an independent check and that's what credit bureaus can do for you. For a very minimal charge or no cost, you can check your customers' credit rating from an independent source. The major credit bureaus are listed at the end of this chapter.

If your customer is a corporation, consider using Dunn and Bradstreet (D&B) services for checking past payment history and related information. Find them on the Internet at http://www.dnb.com/.

If your business will be incorporated and you will be dealing with vendors, consider obtaining a credit rating from D & B for your own business. See the reference section for additional information.

TRUISM 23
A customer whose credit you check will always be a good risk
... don't check and it will be bad.

Check credit of EVERY customer before accepting his order. If you have any doubt about the possibility of being paid, request payment prior to shipment or performance of your services. Don't be shy about this. If you are questioned, simply indicate that your check of their credit was not satisfactory.

INSURANCE

The importance of insurance cannot be over-emphasized and neither can the danger of paying for insurance you don't need. We will briefly discuss the various types of insurance that you should consider for your business and also strongly recommended you solicit the advice of an in-dependent business insurance agent. Don't forget to SHOP! Talk to three or four independent agents and compare notes and prices. An insurance agent will lay out a vast array of insurance coverage much of which you simply may not need. Your situation will be unique and you must consider each insurance element carefully to ensure comprehensive coverage. Visit the Independent Insurance Agent's of America website at http://iiaa.iix.com/ for a variety of excellent general information.

In some cases, insurance coverage can be obtained at favorable group rates through various professional associations such as the Chamber of Commerce. (Find a Chamber of Commerce you at http://www.uschamber.com/mall/index.html). You should check with your own professional associations.

Whatever your final insurance program looks like, you should review it at least every six months. Your business can change rapidly, especially in the first few years and insurance needs change with it. Keep your program up to date by calling in your agent and reviewing your coverage. Make changes where necessary.

Liability Insurance. This is probably the most important element of your insurance program. Liability insurance provides protection from potential losses resulting from injury or damage to others or their property. Just recall some of the big cash awards you have read about that have resulted from lawsuits concerning liability of one kind or another and you will understand the importance of this insurance. Your insurance agent can describe the various types of liability insurance coverage that are available. If you will end up with a comprehensive general policy, make certain that the general policy does not include items you don't need. Pay for only the insurance you need. For example, your business may not need product liability insurance.

Do not confuse business liability coverage with your personal liability coverage, both of which you need. Your personal coverage will not cover a business-generated liability. Check to be certain.

Compare the costs of different levels of coverage. In some cases a $2 million policy costs only slightly more than a $1 million policy. This economy of scale is true with most forms of insurance coverage. That is, after a certain value, additional insurance becomes very economical.

ESI was a small firm run by three partners, a software programmer, marketer, and a general manager. Their product was a complex com-puter program used by aerospace firms. Ed, the programmer, was involved in a severe automobile accident, became totally disabled, and ESI lost their programming capability. The problem was that the computer program written by Ed was essentially the company's sole product. Modifications to accommodate the customer became impossible and the time to bring another programmer up to speed was excessive. ESI lost considerable business as a result of this situation. These losses could have been offset by key person insurance.

Key Person Insurance. This type of insurance is particularly important for the sole proprietorship or partnership where the loss of one person through illness, accident, or death may render the business inoperative or severely limit its operations. This insurance, although not inexpensive, can provide protection for this situation. Key person insurance might also be necessary for others involved in your business.

Disability Insurance. You, as a business owner, should be covered by disability insurance whether or not you decide on key person insurance. This insurance, along with business-interruption insurance, described below, will help ensure your business will continue to operate in the unfortunate situation where you are unable to work. Your disability insurance policy needs to provide satisfactory coverage. Particular attention should be paid to the definition of "disability," delay time until payments start, when coverage terminates, and adjustments for inflation.

Fire Insurance. Fire insurance, like all insurance is complicated and you should understand what IS and IS NOT covered. For example, a typical fire insurance policy covers the loss of contents but does not cover your losses from the fact that you may be out of business for 2-months while your facility is rebuilt. Fire insurance is mandatory whether you're working out of a home office or you have a separate facility. You should discuss a comprehensive policy with your agent. Take the time to understand the details. For example, will the contents be insured for their replacement value or for actual value at the time of loss?

Consider a co-insurance clause that will reduce the policy cost considerably. This means that the insurance carrier will require you to carry insurance equal to some percentage of the value of your property. (Usually around 85%.) With this type of clause it is very important that you review coverage frequently so you always meet the minimum percentage required. If this minimum is not met, a loss will not be paid no matter what its value.

If you are working out of your home, your existing homeowners policy may not cover business property. If this is the case, have your insurance agent to add a home-office rider to your policy. Automobile Insurance. You probably already have automobile insurance but it might not include bus-iness use of your vehicle. Make sure that it does.

Worker's Compensation Insurance. If you make the decision to hire employees, you will be required, in most states, to cover them under worker's compensation. The cost of this insurance varies widely and depends on the kind of work being performed and your accident history. It is important that you properly classify your employees to secure the lowest insurance rates. Work closely with your insurance agent.

Business Interruption Insurance. This protects against loss of revenue as the result of property damage. This insurance would be used, for instance, if you could not operate your business during the time repairs were being made as a result of a fire or in the event of the loss of a key supplier. The coverage can pay for salaries, taxes, and lost profits.

Credit Insurance. This will pay for unusual losses as the result of nonpayment of accounts receivables above a certain threshold. As with all policies, you must thoroughly understand the details so discuss it with your insurance agent. One of the largest providers of this coverage is American Credit Indemnity, Baltimore, MD. (800) 879 1224.

Burglary/Robbery/Theft Insurance. Comprehensive policies are available that protect against loss from these perils, including by your own employees. Make certain you understand what is excluded from coverage.

Rent Insurance. This policy covers the cost of rent for other facilities in the event your property becomes damaged to the extent that operations cannot continue in your normal location.

Disability Insurance. This insurance will pay you an amount each month slightly less than your current salary in the event you become disabled and are unable to work. Cost for this coverage varies considerably depending on your profession, salary level, how quickly benefits start, and when they end. Benefits paid are tax-free only if you, not your company, pay the premiums.

This list could be continued since it is possible to purchase insurance for just about any peril you can imagine ... if you can pay the premium! When considering your insurance coverage, use the following checklist:

CHECKLIST #10: INSURANCE COVERAGE

• Can you afford the loss?
• What coverage is required by Federal, state, or local law?
• What SPECIFIC items are covered by the policy?
• Are items to be insured for their replacement cost or original value?
• What SPECIFIC items are EXCLUDED by the policy?
• If there is a co-insurance clause, do you have adequate coverage?
• Have you chosen deductibles wisely in order to minimize costs?
• Do any of the policies you are considering duplicate or overlap one another?
• Do you need any insurance based on location, e.g., flood, earthquake?

CHECKLIST #11: INSURANCE PLAN

• Employ an independent insurance agent rather than going to individual insurance companies. Ensure the agent shops for your insurance.
• Talk to and get quotations from at least THREE agents and pick the best one for you.
• Use money saving comprehensive policies, if possible.
• Perform periodic (every 6-months) reviews of your insurance program.
• Have business assets professionally appraised to determine coverage needs.
• Ensure existing personal insurance coverage includes business-related activities and add riders as necessary or obtain additional coverage.

Protecting your personal assets is a vital part of your business planning. It is important to consider possible liabilities before disaster strikes. Select an insurance agent who can lay out a comprehensive, cost-effective insurance program. Use legal services when required, check on your customers credit in a timely fashion and be careful with personal guarantees. Make certain you understand your insurance policies.