Protecting Business Interests

Whether making strategic decisions, managing staff, or building relationships with customers, running a business takes time, focus and energy.

In our experience, business owners don’t have the time to pay enough attention to their own financial planning goals, or the potential risks to their business. Seeking tailored financial planning advice can help business owners plan for the future with confidence.

Life is unpredictable, and business owners should take the time to consider the impact of death or serious illness of a business partner, key employee, or shareholder. This could mean years of hard work building a business could be placed in jeopardy and could also compromise the retirement plans of a business owner.

Losing key personnel to death or serious ill health could have devastating consequences for the future success of the business and its’ employees. Some businesses may even face closure due to the loss of an individual who is vital to the success of the business. This is why business owners should consider taking out Key Person protection for any individual whose loss could have a direct impact on the profitability of the business.

Key Person protection is an insurance policy that provides a cash benefit to the company in the event of the death, diagnosis of a terminal illness, or a specified critical illness, of a key individual in the business. The funds paid to the business from a valid claim could be used to help cover any potential reduction in profits due to the missing individual, meet ongoing business expenses, or pay for recruitment and training costs for a replacement employee. Premiums for such policies are usually treated as a business expense and therefore tax deductible.

Once the decision to arrange cover has been reached, the business needs to decide on the level of cover required. Naturally, the cover should provide adequate compensation for the specific needs of the business, but at a premium that is affordable.

The level of cover can be based on the amount of income generated by the key person, or by calculating the level of contribution that individual has made to the business earnings in previous years. The duration of cover also needs to be determined. For example, do you need to cover an individual until their retirement date, or will the value of an individual to the business diminish over time?

The loss of a key employee is only one of a range of risks that a business could potentially face. Death of a shareholder or business partner could also have a significant impact, and how the business ownership is structured could lead to challenges in the event of death of a shareholder.

It is quite common for a shareholder in a small business to prepare a will that leaves their shares in the business to their spouse or children on death. This is understandable, as the value of the shares are left to the benefit of family members. The spouse or children may not, however, have any interest in being a shareholder in the business and may prefer to sell the inherited shares to other shareholders. This may also be the desired outcome from the other shareholders’ perspective.

The shares will have a value, and other shareholders may have difficulty raising the necessary finance to purchase the shares. This is where a shareholder protection policy, arranged in an appropriate manner under a trust arrangement, can provide the necessary funds to the other shareholders so that the deceased shareholder’s shares can be purchased from the estate. Seeking the right advice is critical to ensure that an adequate level of cover is established, either using company profitability or net assets on which to base the calculation.

Whilst these policies present a further cost to a business, it is worth reflecting on the potential cost of not covering unforeseen events. Speaking to an independent financial planner can help review your business protection needs and arrange appropriate cover where necessary from insurers across the marketplace.

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