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Entrepreneurs are a special breed of people. They are driven by passion – they want to succeed and they set out believing that they will. The unfortunate reality, however, is that many small businesses don’t survive past the first year. A recent ‘Life Surprises’ survey by Sanlam revealed that over 90% of people who faced the closure of their own business regarded the financial impact as ‘devastating’. What makes small businesses fail? And how can entrepreneurs prepare for not only the financial consequences, but also the emotional impact?

“Statistics from the Department of Trade and Industry last year showed that five out of seven new small businesses fail within the first year,” says Jannie Rossouw, Head of Sanlam Business Market.

He cites the main reasons for small business failure as being lack of management skills, insufficient cash flow, poor planning, over-expansion, poor marketing insight leading to inadequate marketing element application, and inappropriate location. “However, no matter how well you run your business, there are some things beyond your control – with the advent of the digital era, for example, we’ve seen many businesses fail simply because they were not adaptable or relevant to the new age we live in.”

The survey, conducted among South Africans over 50, found that 65.6% of respondents whose businesses had failed were not at all financially prepared for this event. But in addition to the financial consequences, the emotional fall-out can also be overwhelming.

“This is not surprising – the closure of a business can be like the death of a loved one. Entrepreneurs invest everything into their ‘baby’, so if it doesn’t work out, it affects both their professional and personal sense of self-worth. Business closure can lead to depression, stress-related illness and family breakdown,” says Rossouw.

He says although you cannot always safeguard a business from closure, you can protect your own estate against such failure. “With the assistance of a professional financial adviser, you can draw up a financial plan which could ensure you are adequately prepared for unexpected events that could otherwise have severe financial complications for you, your business and your family.”

Rossouw says it is critical to address key challenges such as insuring both business and personal risk in order to avoid scenarios where creditors can lay claim to assets should disaster strike. “For example, if you sign surety for finance, you can be held personally liable for the funds, and need to make sure that the necessary contingency cover is in place to prevent a financial meltdown should you become disabled and unable to operate your business and repay the debt.”

As a business owner, you need to make sure you understand and manage all aspects relating to your financial situation – from insuring the business, to insuring key people in the business and insuring your life and assets.

“To further protect your personal estate, it is a good idea not to put all your eggs in one basket – i.e. your business. Investing in a retirement annuity, for example, will ensure you will have funds available at retirement, since creditors will not be able to access this in the event of your business being forced to close.”

Rossouw says careful management of your personal financial affairs will go a long way to reducing not only the financial impact of business closure, but also the emotional consequences. “If you know your personal estate is protected no matter what happens to your business, you will at least not have to worry about being steeped in debt and providing for yourself and your family while you get back on track and consider your next venture,” he concludes.

BOX – summary of key findings

  • 78.5% of people claim to have had unexpected life events (good or bad) in either their own lives or that of a member of their family.
  • Just less than a third of the sample (28.2%)expect to outlive their partners.
  • Of those who expect to outlive their partner, the majority (35.0%) are uncertain about how many years longer they will live, but just over a fifth (21.4%) expect to outlive them by between five and 10 years and 29.7% say they expect to live for more than 10 years after their partner dies.
  • Over half expect to live well into their 80s but only 1.3% of believe they will live to be over 120.
  • Most expect to die of old age (46%) or illness (13.8%).
  • Half the sample (49.5%) reported a death in the family as being the event that has had the biggest emotional impact on them.
  • 97.2% of those that lost savings or pension savings rated this event as having a devastating or high financial impact, whereas 93.7 % of people that faced the closure of their own business rated the financial impact as being devastating or high. 89.2% of people that lost their income or were retrenched rated this as having a devastating or high financial impact.
  • People find themselves largely unprepared for the financial impact of these events.
  • 40.5% currently support a family member that they were not expecting to support. Grandchildren (44%), children (43.6%), extended family members (20.2%), parents (12.8%) and spouses (11.1%) are cited most as having to be unexpectedly supported.
  • Respondents have many financial regrets - 74.3% of the people surveyed would change something in their financial preparation and 82.3% wished that they had done more to be better financially prepared for life.
  • Things that they would change: to save more of their earnings (54%), start saving for retirement earlier (47.5%), provide for unexpected life events (43.7%), spend less (42.6%)and get advice from a financial planner (14.3%).
  • Over a third of the sample (31.7%) got their financial advice from a financial planner, but 28.5% did their own research and planning, and 23.2% got advice from their parents or no-one (21%).
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