Much like sunscreen, business insurance is one of those things you don’t realize how important it is until you’ve been burned: A lot of entrepreneurs don’t have it, and those who do, may not be fully covered.
While large corporations have staffers specifically trained to be sure the business is protected adequately, small business owners are often not aware of the risks their business faces.
“Smaller businesses tend not to get the right amount of coverage,” says Loretta Worters, vice president of the Insurance Information Institute, an industry trade group that aims to educate the public about insurance. “They will get too little or not the right coverage.”
Here, three of the most common mistakes to avoid when deciding on business insurance.
1. You view insurance as one-size-fits-all. Think again. There are four basic types of insurance that all businesses need, according to Worters. Property insurance protects the building that your business is housed in and the inventory, raw materials and computers that you own. Liability insurance protects you against lawsuits. Business vehicle insurance covers any autos owned by the business. Finally, in every state except Texas, a business with employees must have workers compensation insurance should an employee be injured on the job.
Related: Do You Need a Full-Timer, Contractor or Outsourced Help?
In addition, every industry has its own specific risks and your business may require a specialized policy. “You need to get an agent that understands your line of business,” says Worters, noting that you should talk to an agent before just signing up with one. Ask a local business group or association for a recommendation.
2. You think you're covered by another policy. “The biggest mistake [business owners] make is they assume they don’t need coverage,” says Ted Devine, CEO of Dallas-based Insureon, an online small-business insurance agency. He says business owners often falsely believe their company is covered by their client's policy or they're no longer at risk when a client leaves. Not true, according to Devine. A client can come back and sue you years after an event or transaction occurs, he warns.
And don't think your homeowner's policy will bail you out, either. Even if you have a home-based business, a homeowner's policy won't protect it should you get into any legal issues with employees or business litigation. Whether the homeowners’ policy will protect your business property in your home depends on the policy, says Devine.
Related: Does Your Home Business Need Insurance?
3. You think you're invincible. Worters says many businesses don’t even consider what is called either business income or business interruption insurance. If a natural disaster hits, for example, and your business closes, your revenue can be immediately shut off for an undetermined amount of time, and that can really threaten the life of your business.
Although I was by no means the world's greatest law student, the fact that I could write well, was older than most of my classmates and had some real-world experience landed me one of the best jobs of anyone in my class upon graduation: working at the big firm in the big city while making the big bucks.
But that dream job soon turned sour when it dawned on me that they weren't paying me that sweet salary for nothing. The hours were grueling and the work demanding. Before long, I was dreaming about leaving that "dream job" and starting my own law practice.
But doing that was easier said than done. As anyone who has ever contemplated starting a business knows, the risks of the venture loom large. How does one leave the security of a job and paycheck and benefits for the uncertainty of a new business? The potential perils seemed too big. And then I remembered the words a wise old entrepreneur once told me:
"An entrepreneur is a person willing to take a risk with money to make money."
Right he was -- risk is part of the game. There was no way around it. Trying new ideas, opening a new location, launching a new product line -- it all involves risk. So maybe the first question to ask yourself if you are thinking about starting a business is whether risk-taking is part of your DNA. Because if it is not, you will have a problem from the get-go.
That said, it's equally true that the best entrepreneurs are risk savvy. They know that, while taking risks is inevitable, they should never be wild, crazy risks. Instead, one trait shared by great entrepreneurs is that they look to make their risks smart, calculated ones.
Risks: The good, the bad and the gut-wrenching
How can you tell the difference? After all, with great risks come great rewards, and as such, it's sometimes hard to see the forest for the trees.
One way is viscerally -- you know a big risk when you see one. It registers in your gut. In his great book "Blink," Malcolm Gladwell posits that gut reactions are often the best reactions because your subconscious takes in all available information and registers very reliable instant responses. In other words, if you find yourself waking up in the middle of the night worried about X, it just may be true that X is the sort of risk you will want to avoid in the future.
That said, and with all due respect to Gladwell, risk-savvy entrepreneurs also use their left brain as much as their right. Gut reactions are good and all, but they cannot substitute for some old-fashioned, logical analysis.
When analyzing a business risk, consider:
The upside potential. You are taking a risk to get ahead, so you need to begin with what can go right if it works. The problem here is that this is too often where the analysis stops because the perceived results are so darned enticing that people experience brain freeze. Don't make that mistake.
The worst-case scenario. One way risk-savvy entrepreneurs become risk savvy is by making mistakes. Mistakes will happen in your business, too -- guaranteed. And given that, it's your job to make sure that no single mistake will cripple your business.
Mistakes happen. The worst-case scenario happens. No one at Time Warner or AOL ever expected their merger would later be considered the worst in history -- but it was, and it almost destroyed both businesses in the process.
If the risk is such that, should it fail, you will still be OK (albeit damaged), then you're good to go. But if the downside possibility would be crippling, it's not worth it. Period.
The last part of the equation for becoming risk savvy is that before ever taking any risks, smart entrepreneurs put in place mechanisms to make sure their exposure is never too great. That's what you should do, too.
These include:
Insurance. What's the point of insurance? It's to reduce your risk. Not being properly insured is business malpractice.
Incorporation. It almost goes without saying, but any small-business person who wants to be risk savvy will have incorporated his or her business. The corporate shield protects your personal assets from business risks and mistakes.
Written contracts. People remember things differently. People don't remember things at all. People remember things incorrectly on purpose. A written contract is your protection against all of these unenviable incidents.
So yes, while risks are part of business, the savvy small-business owner will work to minimize them.
Glenn Smith faces a common problem. Founder and owner of Micro Integration Services Inc., a New Jersey-based computer and software consulting firm, Smith would like his son, who works in the business, to take it over some day. But Smith also has a daughter who's not involved in the business, and wants to make sure she gets her fair share of his estate, too.
Passing on a family business can get tricky when one child works in the business and another does not, especially if the majority of the owner's wealth is tied up in the business. That's not uncommon. "This is more of a typical situation than an atypical one," remarks David Levi, lead managing director of CBIZ MHM LLC, an accounting and business management services firm in Minneapolis, Minnesota.
The life insurance option
If this sounds like your situation, there are several options for making sure your children are treated fairly. One is to simply take out a life insurance policy on yourself and name the child not involved in your company as the beneficiary.
Unfortunately, notes Louis Pashman, a founding partner of the law firm Pashman Stein in Hackensack, New Jersey, this isn't always workable. For starters, it assumes your health will allow you to qualify for life insurance, and that you can afford the premium.
Figuring out how much insurance to buy is another challenge. Your business may be worth $2 million today but could be worth $10 million -- or nothing at all -- by the time the insurance policy pays out. "Assuming it's affordable, you might try buying a larger policy than you need and naming both children as beneficiaries, albeit perhaps not equal beneficiaries," Pashman says. "Then you can adjust the percentages over time if you wish."
Another possible wrinkle: The child inheriting the business may conclude he's actually receiving the lesser deal. "He's getting an asset he has to maintain and nurture," Pashman explains. "All the other child has to do is throw their money into a bank or brokerage account." If you're sympathetic to that concern (you may not be), you'll just have to decide what amount of insurance you consider fair.
Sell the business to the interested child
If insurance isn't available or is too costly, you could have the child involved in your business buy it, perhaps piecemeal over time, out of his or her salary. As that happens, the proceeds become part of your estate, which you can divide equally among your children upon your death.
Give the business to both children
If neither of the first two options appeals, you could just leave your company to both your children and let them divide the spoils. Consider leaving 51 percent to the child who will run the business, given his or her management responsibility, and 49 percent to the other. Then, draft an agreement that the former will buy the latter's shares on a predetermined schedule.
"One of the upsides is that you're not taking any cash out of the business to pay life insurance premiums that maybe Dad [or Mom] can't afford," Levi notes. "The bad news is the children are hitched together. If the controlling shareholder is not successful with the business, the other child will pay a price as well."
Susan Johnson, owner of Susan's Healthy Gourmet, a prepared-foods delivery business in Southern California, is willing to accept that risk. Her daughter, who works in her business, already owns 1 percent of the company. Johnson's will specifies that if anything happens to her, the remaining 99 percent gets split evenly between her daughter and her son, who isn't involved in the company.
"As the majority shareholder, my daughter will have the ability to control where the company's money goes and how much the business needs to sustain itself and pay employees, including her salary," Johnson says. "Any additional profits would be split evenly between her and my son."
Smith is considering a similar solution. He says that his son, after nine years with the company, has sweat equity in the business. Smith is contemplating giving his son that equity now. Then, if something should happen to Smith, his remaining shares would be split evenly between his son and daughter.
Whatever approach you consider, Pashman suggests discussing it with your children, who may have good ideas, too. The child running the business, for example, might be willing to pay a sibling to do consulting work to help even things out.
"I've even seen instances where the business is so successful that the involved child has had no problem, simply on a personal basis, giving money to the non-involved child, in the form of a gift, to equalize the situation," Pashman says. "As long as the business remains successful and the people involved remain a family, you can usually work through these things."
While large corporations have staffers specifically trained to be sure the business is protected adequately, small business owners are often not aware of the risks their business faces.
“Smaller businesses tend not to get the right amount of coverage,” says Loretta Worters, vice president of the Insurance Information Institute, an industry trade group that aims to educate the public about insurance. “They will get too little or not the right coverage.”
Here, three of the most common mistakes to avoid when deciding on business insurance.
1. You view insurance as one-size-fits-all. Think again. There are four basic types of insurance that all businesses need, according to Worters. Property insurance protects the building that your business is housed in and the inventory, raw materials and computers that you own. Liability insurance protects you against lawsuits. Business vehicle insurance covers any autos owned by the business. Finally, in every state except Texas, a business with employees must have workers compensation insurance should an employee be injured on the job.
Related: Do You Need a Full-Timer, Contractor or Outsourced Help?
In addition, every industry has its own specific risks and your business may require a specialized policy. “You need to get an agent that understands your line of business,” says Worters, noting that you should talk to an agent before just signing up with one. Ask a local business group or association for a recommendation.
2. You think you're covered by another policy. “The biggest mistake [business owners] make is they assume they don’t need coverage,” says Ted Devine, CEO of Dallas-based Insureon, an online small-business insurance agency. He says business owners often falsely believe their company is covered by their client's policy or they're no longer at risk when a client leaves. Not true, according to Devine. A client can come back and sue you years after an event or transaction occurs, he warns.
And don't think your homeowner's policy will bail you out, either. Even if you have a home-based business, a homeowner's policy won't protect it should you get into any legal issues with employees or business litigation. Whether the homeowners’ policy will protect your business property in your home depends on the policy, says Devine.
Related: Does Your Home Business Need Insurance?
3. You think you're invincible. Worters says many businesses don’t even consider what is called either business income or business interruption insurance. If a natural disaster hits, for example, and your business closes, your revenue can be immediately shut off for an undetermined amount of time, and that can really threaten the life of your business.
Although I was by no means the world's greatest law student, the fact that I could write well, was older than most of my classmates and had some real-world experience landed me one of the best jobs of anyone in my class upon graduation: working at the big firm in the big city while making the big bucks.
But that dream job soon turned sour when it dawned on me that they weren't paying me that sweet salary for nothing. The hours were grueling and the work demanding. Before long, I was dreaming about leaving that "dream job" and starting my own law practice.
But doing that was easier said than done. As anyone who has ever contemplated starting a business knows, the risks of the venture loom large. How does one leave the security of a job and paycheck and benefits for the uncertainty of a new business? The potential perils seemed too big. And then I remembered the words a wise old entrepreneur once told me:
"An entrepreneur is a person willing to take a risk with money to make money."
Right he was -- risk is part of the game. There was no way around it. Trying new ideas, opening a new location, launching a new product line -- it all involves risk. So maybe the first question to ask yourself if you are thinking about starting a business is whether risk-taking is part of your DNA. Because if it is not, you will have a problem from the get-go.
That said, it's equally true that the best entrepreneurs are risk savvy. They know that, while taking risks is inevitable, they should never be wild, crazy risks. Instead, one trait shared by great entrepreneurs is that they look to make their risks smart, calculated ones.
Risks: The good, the bad and the gut-wrenching
How can you tell the difference? After all, with great risks come great rewards, and as such, it's sometimes hard to see the forest for the trees.
One way is viscerally -- you know a big risk when you see one. It registers in your gut. In his great book "Blink," Malcolm Gladwell posits that gut reactions are often the best reactions because your subconscious takes in all available information and registers very reliable instant responses. In other words, if you find yourself waking up in the middle of the night worried about X, it just may be true that X is the sort of risk you will want to avoid in the future.
That said, and with all due respect to Gladwell, risk-savvy entrepreneurs also use their left brain as much as their right. Gut reactions are good and all, but they cannot substitute for some old-fashioned, logical analysis.
When analyzing a business risk, consider:
The upside potential. You are taking a risk to get ahead, so you need to begin with what can go right if it works. The problem here is that this is too often where the analysis stops because the perceived results are so darned enticing that people experience brain freeze. Don't make that mistake.
The worst-case scenario. One way risk-savvy entrepreneurs become risk savvy is by making mistakes. Mistakes will happen in your business, too -- guaranteed. And given that, it's your job to make sure that no single mistake will cripple your business.
Mistakes happen. The worst-case scenario happens. No one at Time Warner or AOL ever expected their merger would later be considered the worst in history -- but it was, and it almost destroyed both businesses in the process.
If the risk is such that, should it fail, you will still be OK (albeit damaged), then you're good to go. But if the downside possibility would be crippling, it's not worth it. Period.
The last part of the equation for becoming risk savvy is that before ever taking any risks, smart entrepreneurs put in place mechanisms to make sure their exposure is never too great. That's what you should do, too.
These include:
Insurance. What's the point of insurance? It's to reduce your risk. Not being properly insured is business malpractice.
Incorporation. It almost goes without saying, but any small-business person who wants to be risk savvy will have incorporated his or her business. The corporate shield protects your personal assets from business risks and mistakes.
Written contracts. People remember things differently. People don't remember things at all. People remember things incorrectly on purpose. A written contract is your protection against all of these unenviable incidents.
So yes, while risks are part of business, the savvy small-business owner will work to minimize them.
Glenn Smith faces a common problem. Founder and owner of Micro Integration Services Inc., a New Jersey-based computer and software consulting firm, Smith would like his son, who works in the business, to take it over some day. But Smith also has a daughter who's not involved in the business, and wants to make sure she gets her fair share of his estate, too.
Passing on a family business can get tricky when one child works in the business and another does not, especially if the majority of the owner's wealth is tied up in the business. That's not uncommon. "This is more of a typical situation than an atypical one," remarks David Levi, lead managing director of CBIZ MHM LLC, an accounting and business management services firm in Minneapolis, Minnesota.
The life insurance option
If this sounds like your situation, there are several options for making sure your children are treated fairly. One is to simply take out a life insurance policy on yourself and name the child not involved in your company as the beneficiary.
Unfortunately, notes Louis Pashman, a founding partner of the law firm Pashman Stein in Hackensack, New Jersey, this isn't always workable. For starters, it assumes your health will allow you to qualify for life insurance, and that you can afford the premium.
Figuring out how much insurance to buy is another challenge. Your business may be worth $2 million today but could be worth $10 million -- or nothing at all -- by the time the insurance policy pays out. "Assuming it's affordable, you might try buying a larger policy than you need and naming both children as beneficiaries, albeit perhaps not equal beneficiaries," Pashman says. "Then you can adjust the percentages over time if you wish."
Another possible wrinkle: The child inheriting the business may conclude he's actually receiving the lesser deal. "He's getting an asset he has to maintain and nurture," Pashman explains. "All the other child has to do is throw their money into a bank or brokerage account." If you're sympathetic to that concern (you may not be), you'll just have to decide what amount of insurance you consider fair.
Sell the business to the interested child
If insurance isn't available or is too costly, you could have the child involved in your business buy it, perhaps piecemeal over time, out of his or her salary. As that happens, the proceeds become part of your estate, which you can divide equally among your children upon your death.
Give the business to both children
If neither of the first two options appeals, you could just leave your company to both your children and let them divide the spoils. Consider leaving 51 percent to the child who will run the business, given his or her management responsibility, and 49 percent to the other. Then, draft an agreement that the former will buy the latter's shares on a predetermined schedule.
"One of the upsides is that you're not taking any cash out of the business to pay life insurance premiums that maybe Dad [or Mom] can't afford," Levi notes. "The bad news is the children are hitched together. If the controlling shareholder is not successful with the business, the other child will pay a price as well."
Susan Johnson, owner of Susan's Healthy Gourmet, a prepared-foods delivery business in Southern California, is willing to accept that risk. Her daughter, who works in her business, already owns 1 percent of the company. Johnson's will specifies that if anything happens to her, the remaining 99 percent gets split evenly between her daughter and her son, who isn't involved in the company.
"As the majority shareholder, my daughter will have the ability to control where the company's money goes and how much the business needs to sustain itself and pay employees, including her salary," Johnson says. "Any additional profits would be split evenly between her and my son."
Smith is considering a similar solution. He says that his son, after nine years with the company, has sweat equity in the business. Smith is contemplating giving his son that equity now. Then, if something should happen to Smith, his remaining shares would be split evenly between his son and daughter.
Whatever approach you consider, Pashman suggests discussing it with your children, who may have good ideas, too. The child running the business, for example, might be willing to pay a sibling to do consulting work to help even things out.
"I've even seen instances where the business is so successful that the involved child has had no problem, simply on a personal basis, giving money to the non-involved child, in the form of a gift, to equalize the situation," Pashman says. "As long as the business remains successful and the people involved remain a family, you can usually work through these things."
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