As a small or medium sized business owner, you should be proud to form the backbone of the UK economy. You currently form 99% of the number of UK private sector businesses, and 60% of employment in the private sector is reliant on SME’s like yourselves, making you vital to the UK economy.
Being so vital to the UK economy means as business owners, you are aware of the risks that you may face including changes in the economy, competitors and ongoing profitability. You are also prudent enough to cover some of these risks like premises, machinery, vehicles and computer systems. Yet these are not the necessarily the biggest risks you may face as a business owner.
There are other risks that many business owners have not been made aware of. One of these being people, whether that be you as a business owner or a key member of staff. But people are the real source of the profit and ongoing success of your business.
I am sure that you would agree that if a key person in your business died, or became critically ill, it could have dire consequences on your business.
Depending on the nature of your business, the outcomes from the loss of an owner or key member of staff could be very different.
Some examples might be:
How are your customers going to react?
Are you likely to lose turnover through not being able to provide the same level of service?
You would also need to think about creditors and whether the credit terms can be maintained if you have problems?
Were those credit terms dependent or guaranteed by the person that died?
Competitors are also likely to be attacking your client base which can cause further issues.
What happens to the shares of the key person/shareholder?
With the answers to these questions being potentially the end of the business, it is vital that people are given the same importance as premises and computer systems when it comes to cover.
If a computer system stops working this can be damaging, but it is limited and short term. However, a person dying can have a lasting impact on the business. Yet very few businesses have this type of protection in place.
As a business owner this can be a very daunting topic and knowing where to start is often difficult. However, a good financial adviser can help you find your way through the above questions and get to the areas that really matter to you and your business’ ongoing success.
Where to start
The first stage in ensuring your business is adequately covered is to go through what makes your business tick and who helps make that happen.
The most prominent question this brings to mind is, what is the contribution of each individual, identified as helping the success of the business, makes to the gross profit of the business?
If you lost that person, or people, is it going to take time to get somebody else in and for the replacement to start contributing to the business?
You also need to consider replacement costs. This will include paying recruitment agencies plus the associated costs of ‘golden hellos’ and share option buyouts. You may have to bring the most suitable candidate in from another part of the country which can be expensive.
Other areas to consider is who has injected their own cash into the business?
A lot of businesses will use Director Loan Accounts as a way of providing flexible funding, but they need to be repaid on the death of the individual. Bank loans may need to be repaid especially if there’s any personal security or guarantor of a loan.
Another major consideration is the ownership of the business. The business will need money to make sure that the remaining shareholders can buy the shares off the deceased’s estate.
This is important for two reasons:
- As a surviving business owner, you will want to keep control of your business without the deceased person’s estate getting involved.
- It’s important that when shares are given up the estate gets a fair market value. This can be achieved by having a funded succession strategy in place.
Very few businesses have the cash to buy back shares and borrowing may not always be possible. Especially if the person that died was the driver behind the profits in the business, the bank may feel that profits will fall and be unhappy to lend.
What about illness?
These are a few of the risks relating to death, but there are other risks associated with illness – what if, after developing a critical illness, one of the shareholders/directors wants to retire and sell shares? The business may not be in a position to buy the shares, so they may be sold to a competitor.
What if a key person leaves the business due to illness? Then the above scenarios become true again.
As a business owner you can take action and, with help from a financial adviser, get the protection you need to make sure your business can continue to thrive.
A lot of businesses in the UK consider employment benefits, pension schemes and staff protection via group schemes, yet the business itself can be overlooked. However, the business is pivotal to everything else. Without it, none of the other components would link together.
Many people think that arranging business protection is a lengthy, complicated process. In fact, the principles are similar to most other types of protection.
Life Assurance plans typically have no cash in value at any time and cover will cease at the end of term. If premiums stop, then cover will lapse.