With recent research indicating that 75% of small businesses are underinsured¹, it’s worth encouraging your clients to take a look at their current business valuation especially when that information dictates their insurance coverage. After all, finding themselves unintentionally part of that statistic could lead to some pretty serious consequences.
The risks to undervalued and underinsured businesses can be critical, and, as their advisor, you’re in an ideal position to help them understand that. Let’s take a look at how you can support your small business owner clients in making sure they don’t fall into the underinsurance trap.
The Dangers of Underinsurance for Small Businesses
Small businesses are crucial to the economy, representing almost half of all private-sector jobs in the US, with 56 million employees, according to The US Bureau of Labor and Statistics.² The outlook is stark if 75% of those businesses aren’t adequately insured.
To only find out that their business doesn’t have enough insurance coverage when they file a claim can have a devastating long-term impact on a small business owner. Consider the owner who finds that their insurance coverage falls short of the actual losses incurred after a fire has devastated their premises. The owner would be liable for the excess themselves, and with claims of this type potentially being in the millions³, they could well be looking at the end of their business. While huge organizations may be able to cover those kinds of losses, smaller businesses, with smaller margins, just can’t afford the risk.
The aftermath of these types of setbacks is often a struggle to pick up the pieces and start again or rebuild. Add to that the added financial burden caused by underinsurance, and many business owners in this position would have no choice but to shut down completely.
Why Aren’t Small Businesses Upping Insurance Coverage?
Your small business owner clients will probably have worked incredibly hard to get their businesses where they are today. And it doesn’t stop. They need to continuously work on their plans to scale and grow, all while managing employees, ensuring they don't fall behind on marketing, keeping track of cash flow, and much more.
The life of a business owner or entrepreneur is often a juggling act, so it’s understandable when balls get dropped. Dropping the ball on regular valuations and changing insurance, however, can have a devastating impact. It’s easy for small businesses to overlook the need for regularly assessing their insurance coverage. Still, in today's rapidly evolving market, where valuations across many industries have grown substantially, it’s essential.
The value of assets, intellectual property, and the business as a whole can change quickly, often leaving existing insurance coverage lacking. And with the economy shifting and risks increasing (think the growth of cybercrime), business owners must keep their valuations and insurance up to date. They simply can’t afford to risk being underinsured.
The Advisor's Crucial Role
This is where you can play a pivotal role. Beyond managing investments and providing financial guidance, advisors carry a fiduciary responsibility to ensure the holistic financial well-being of their clients. Making sure they understand the importance of proper valuation and insurance is not just a suggestion—it's a fiduciary duty.
A current business valuation using a real-time valuation platform like BizEquity ensures that assets and intellectual property are accurately assessed, leading to better, more informed decision-making, including insurance coverage. Having the appropriate coverage safeguards against unforeseen risks, minimizing financial losses in the event of disasters or legal complications.
By emphasizing the importance of accurate business valuation and comprehensive insurance coverage, you not only help your clients to mitigate potential risks, but empower them to navigate challenges with confidence and strengthen the long-term outlook for their businesses. Be a key partner in safeguarding your clients' financial future. Obtain a valuation snapshot for their business in under 2 minutes here.
¹https://www.hiscox.com/documents/2023-Hiscox-Underinsurance-Report.pdf
² https://www.whitehouse.gov/cea/written-materials/2023/05/01/investing-in-small-businesses/
