Succession planning: Why is business protection required?
You can often overlook business protection when you arrange your insurances.
In fact, all companies will have a variety of insurances. At the minimum: public and personal liability, company vehicle insurance and commercial property insurance.
However, many businesses overlook the protection of their most important assets, the owners, and key people.
Above all, they fail to cover the very thing that could put an end to the company and its income, the death or illness of the business owner or key person.
The Key Issues
Business Protection is about protecting the people and profits of the business—you can broadly summarise it into three areas.
Key Person Insurance
Every business like fashion, has at least one key individual who is crucial to the ongoing running and profitability of the business. The absence of this individual due to illness or death can have huge financial implications. You can receive financial support for your business should a key person suffer from unforeseen circumstances from Key Person Insurance. This cash injection can be the lifeline that a business needs at a crucial time
Loan Protection insurance
It is not uncommon for a business to have a loan arrangement with a bank or other lender. It is usually a requirement for the loan amount to be covered by a life and/or critical illness plan. If the business owners have lent money to their own business (e.g. partner or director loan account) then loan protection insurance is critical as the outstanding balances must be repaid on death.
Shareholder Protection
Death or critical illness occurring to a shareholder can cause two issues for smaller businesses:
- Control of the Business: Remaining shareholders will naturally want to retain control of the business, this can prove to be difficult if the deceased’s shares have passed to the family and the business does not have enough cash to purchase them. Raising enough capital, especially when the death of a key person/partner occurs, can be an impossible task without a shareholder protection policy paying out.
Even if there is enough cash in the business to purchase the shares, would you really want to deplete the reserves? This may cause its own issues going forward.
- Fair Value
It may be difficult to guarantee that the sale of the shares will reflect a fair market value… At the time of the death or critical illness occurs. The unhappy party may take legal action if they don’t reach an agreement.
A shareholder agreement will stipulate from the outset how the shares are to be valued and a life insurance policy will ensure the right funds are in the right hands at the right time.
