Guide on Business Assurance in South Africa

As a business owner, you invest a lot of time and money into your enterprise. From coming up with a business idea, financing it and putting the work into making it a reality, it is a proud achievement. The risk comes in when you think, what will happen to your business should you cease to exist? This is where the practice of business assurance comes in.

As a business owner you are focused on running your business, ensuring that you pay salaries, cash flow is good and that you reach your short- and long-term business goals. The only thing that can slip your mind is what you will do when you pass on or can no longer run your business.

Business assurance is not only for big/established businesses but also for small businesses. In this guide we look at what business assurance is and how it applies to your business.

In South Africa, business assurance is defined as cover taken out to protect a business from the potential financial consequences should a member of the business die, become disabled or suffer critical illness. This member can be the owner, an executive or an employee.

Business assurance is very different from business insurance. Assurance is a long-term product range such as life cover, disability, severe illness/disease. Insurance is short term cover for cars, machines, houses, personal items etc.

Why Do You Need Business Assurance?

Business assurance helps you address the fundamental risks that are inherent in business. It helps you manage risks effectively. As mentioned above, one of the risks that can affect a business is the loss of key personnel or shareholders. When you lose key personnel to death or illness, it is sometimes known as economic disability.

Using business assurance as a tool to mitigate risks, you ensure that adequate provision has been made for your business to handle these unforeseen circumstances. Business assurance will help provide certainty, financial liquidity, and plays an important role in your succession plan.

Business assurance consists of three main pillars/categories. These categories help you see what kind of cover your business requires. The four pillars of business assurance are:

Buy and Sell Agreement

The buy and sell cover is an agreement between the business members. This agreement forces the remaining members to buy the deceased’s business interest at a pre-determined price. The purchase price is funded by the life insurance policies affected by the co-owners on each other’s lives.

The buy and sell agreement is important for both the business, its members, the deceased and the deceased’s beneficiaries. Some of benefits of the agreement include:

• Ensures that the business keeps running.
• No one outside the business will be involved in the business.
• The beneficiaries of the deceased will inherit money instead of interest in a business.
• The money received by the beneficiaries can be to replace any loss of income experienced.
• The money can assist with estate planning of the co-owners and their families.

Keyperson Cover

The second pillar in business assurance is keyperson cover. This cover is a life insurance policy that a company purchases on the life of an owner, executive, or any individual considered to be important to the business. The company is listed as the beneficiary of the policy and pays the premiums.

Keyperson cover also has its own benefits for the business and those who will remain behind. Some of the keyperson cover benefits include:

• Financially protects a company against the death or incapacitation of a key person.
• Money from the insurance helps the company be able to hire someone to replace the deceased.
• The money can be used to pay off debts, pay investors or cover any financial costs that may come with losing key personnel.

Contingent Liability Cover

A contingent liability cover helps your business cover debt of setting up the business. Typically, one or more members of the business stands as surety for the loan. If the member(s) passes away, their estate will need to repay that loan.

The benefits of a contingent liability cover are:

• Limits any liability exposure which can come with the death of key personnel.
• The cover can protect the business, its assets and any investments.
• Reduces the financial risks that come with the death of key personnel.
• Important for potential lenders who will see that the company has cover before providing the business with funding.

There are a range of business regulations that exist in South Africa. These include regulations around employers, tax, policies and business assurance. With business assurance, you need to know the tax implications that come with it.

Contingent Liability Cover Tax Implications

In terms of the Income Tax Act, an employer or company may deduct the paid premiums of a policy on the life of an employee, director or executive from the income made by the business. This is done if the policy complies with the following:

• The employer/company is insured against any loss which can be caused by death, disablement, or severe illness of the key personnel.
• The policy is a risk policy with no cash or surrender value.
• The policy is not owned by a person other than your business at the time of payment of the premium.

Note: A contingent liability plan means the company is not insured against loss, but rather the objective is to settle a debt.

Keyperson Cover Tax Implications

The keyperson cover tax is also governed by the Income Tax Act. This gives you a few choices regarding your premiums and you can choose the following:

• Whether your premiums are tax deductible or non-tax deductible, the proceeds are tax free.
• If you want the premiums to be tax-deductible, they will be taxed and you will then have to increase the cover amount.

Requirements For the Premiums to be Tax-Deductible

An employer or company may deduct the paid premiums of a policy on the life of an employee or director from the business income.
For this to happen, the policy must comply with the following conditions:

• The employer or company is insured against any loss by reason of illness, injury or death or an employee, director or executive.
• The policy is not owned by a person other than the employers or business.

The whole point of business assurance is to mitigate risks that come with the loss of key personnel. To do this effectively, you need to have effective risk management strategies:

Create a risk-aware culture in the company

By developing a risk-aware culture within your business you protect your business from unforeseen risks. A risk-aware culture involves educating your employees about risk management and encouraging them to report any potential risks.

Stay up to date with regulatory changes

Staying informed with regulatory changes that can affect your business, means you will stay in compliance with the law. In South Africa this means that you must stay informed with changes regarding the Companies Act, tax laws, employee laws and industry-specific regulations.

Create a contingency plan

A contingency plan does involve ensuring that you have a ‘safety net’ for anything that might affect your company. This includes having emergency procedures, crisis communication plans, business assurance covers, and business continuity plans. Ensure that these plans are updated constantly to ensure they remain effective.

Strong relationships with stakeholders

Strong risk management requires collaboration between you, employees, customers, suppliers and stakeholders. By fostering strong relationships with stakeholders, it creates an environment of open communication and collaboration to managing risks. In business assurance, this can ensure everyone is one the same page in the case of the loss of key personnel.

Leverage and integrate technology

Using technology will always help you mitigate any risks effectively and quickly. Technologies such as artificial intelligence and machine learning can help you identify and address risks before they become bigger problems.

Financial auditing and assurance services

An important aspect of business assurance is financial auditing. When it comes to auditing in business, an auditor will inspect the accounting books of your business. The auditor will also physically check inventory to ensure that all departments are following documented systems of recording transactions.

Benefits of a Business Audit

Some of the benefits of a business audit include:

• It helps you identify any weaknesses in the internal controls of your business.
• Helps you identify where you can make profitable changes.
• Lends credibility to your financial statements (good for lenders and investors).
• Educates you and stakeholders about your business.
• Increases the confidence of your business in stakeholders.

For all this to happen, you need to find a credible assurance company or auditing company to come look at your business.

Assurance services are an independent professional service. This service is usually done by a certified or chartered accountant.

Companies That Offer Assurance Services

PwC South Africa

PwC South Africa has a strong reputation for performing audits for various top companies. The company provides the following assurance services:

• Financial statement audits.
• Sarbanes-Oxley compliance.
• International Financial Reporting Standards (IFRS) reporting.
• Assistance on capital market transactions.
• Accounting, technical and regulatory advice.
• Actuarial services.

Deloitte

Deloitte also has a range of assurance services, which include:

• Accounting operations.
• Accounting and reporting advisory.
• Disruptive events advisory.
• Sustainability, reporting and climate change services.

KPMG

KPMG audit and assurance services are as follows:

• Audit of financial statements.
• Audit data and analytics services.
• IFRS reporting.
• Better business reporting.

BVA Auditors

BVA Auditors has a strong focus on providing services for small to medium-sized enterprises (SMEs). Some of the assurance services include:

• Special purpose auditing reports.
• Forensic investigations of your financial statements.
• Specified procedures and accounting of finances.

These are just a few examples of companies that can provide your business with auditing services. It might be a little expensive, but it will protect your business from any risks and will strengthen your business’ assurance and long-term stability.