The damaging effects of losing a key person
Protecting the business against financial loss requires prior planning
In most organisations, it is possible to identify certain individuals whose contribution is particularly important. Their loss could result in the loss of profits, which could ultimately lead to the business not being able to service or repay outstanding loans, or may lead to plans being curtailed for expansion.
Key man life Insurance cover is a policy taken out to protect a business against the financial loss of the key people who drive the business or against the financial repercussions of loosing them. These key people are typically those whom without the business could financially suffer.
Business owners logically insure their equipment, or their company cars, but what about the most important assets of your company, “the key people,” the directors, partners, shareholders, integral managers, or key IT development specialists or development operators.
Key person insurance will enable you to protect profits that may see a serious fall without that person. In addition, this insurance can provide an income to the company whilst the key person is away from work or to train or recruit their replacement.
Monies can also be made available to the remaining directors, shareholders or partners in order for them to buy out the shares from the original owner. These shares may otherwise fall into the wrong hands such a wife or husband who knows nothing about your business.
The insurance payout could also be made available to anyone involved in guaranteeing business loans or other banking facilities.
The damaging effect of loosing a key person may go well beyond just the cost of their replacement. They could be the sole reason why the business is doing so well. So it is logical that insurance to cover any loss of profits is an important consideration for business owners.
Families of the deceased or long term ill may also want to sell their stake in the business to someone unfit to hold such a high position within the company. Or a member of the family may want to take up a place on the board and make decisions within your company. Insurance policies can be set up to provide the necessary finance to buy the shares from the original shareholder or their family.
Business’s will often have loans or will have raised finance, which will often require a guarantee or charge on their personal property. Lenders may well and often do call in the loan at this time. An insurance product can be structured to pay off this loan and free the business and possibly the family from this financial burden.
Shareholder protection
Could you retain control of your business?
When you run a business typically your main focus is directed towards the day-to-day operations and trading position, but have you ever considered the impact of a shareholder dieing or becoming seriously ill?
Shareholder or Partnership Protection is available to people who are in business with others in a limited company or a partnership. It allows for sufficient funds to become available in the event of the death or serious illness of a shareholder. This will ensure that the company can continue to operate unhindered while the ongoing shareholder or their family receive fair compensation for their share of the business. It also enables you to retain control and ownership of your business.
It is essential to provide a safety net following the loss of a shareholder, for the continued financial security, business stability, and continuity, particularly for private limited companies where there may only be a small number of principal shareholders.
If overlooked and without prior planning for such an event, shares could end up going to the deceased’s family, which has no interest in the business and would prefer a cash sum. The company or other shareholders will usually want to retain control by buying lost shares, but may not have the resources to do so. In addition, the shares may be taken over by someone who does not share the company’s objectives and may even be a competitor.
Did you know?
You can:
- make provision for a cost-effective form of life assurance cover.
- provide cover for a defined term.
- pay out a predetermined lump sum in the event of death during the term of cover.
- include critical illness cover.
- implement a business trust and
cross-option agreement.
Shareholder Protection sets out the procedures and policies to help ensure that you retain control, and have the necessary funds to do so. This means that you can arrange for the most appropriate transfer of shares to the surviving shareholders, or the company, at a fair commercial price.
Insurance policies set up solely for this purpose will ensure the funds are available to purchase the shares and that funds set aside for other purposes will not have to be used.
The key benefit to the business is that it prevents the sale of shares to hostile parties, or competitors, and documentation enables all transactions are made tax-efficiently.
The dependants of the critically ill or deceased shareholder also remain financially secure and the business stability and continuity is maintained. This has the positive effect that there is a retained confidence for both employees and customers.
Protection should be arranged under an appropriate trust from inception and in conjunction with an appropriate partnership agreement.
Buy and Sell Agreement - the advantage of this is that the partners or directors know exactly what will happen, but there are distinct inheritance tax disadvantages as generally Business Property Relief is not available.
Cross Option Agreement - this gives the surviving partners or directors an option to buy the deceased’s share within a specified period, usually six months. The disadvantage of this is that it is based on options rather than obligations. The advantage is that it does not prejudice the availability of Business Property Relief.
The partners or directors have an obligation to effect and maintain life policies on their own lives. A regular review is therefore necessary, and costs can be apportioned between partners or directors.
A variety of plans are available to protect the profits of the business, loans and investments.