To most business owners it would be inconceivable to operate their business without proper insurance cover, against the risk of fire or flood for example. Buildings can be rebuilt and stock replaced, but what would the impact on the business be if one of the business owners or key members of staff passed away unexpectedly, or was diagnosed with a serious illness that meant he or she could never work again? Such an event could devastate a business, yet how many businesses are adequately financially protected against such an occurrence?
Research carried out in 2009 by Legal & General found that 45% of business owners thought that their business would fold within 12 months of the death or serious illness of a key person. Of those questioned 48% did not have any formal agreement setting out what would happen to the business following the death of a business partner or shareholder. A similar situation arose with regard to corporate debt. Legal & General’s survey found that just 38% of businesses with outstanding borrowings made provision to ensure the debt would be cleared on the death or diagnosis of a serious illness of any of the business owners.
Protecting you business can be split into three distinct areas – key person protection, partnership or shareholder protection and loan protection.
Let me provide an example of the dangers of not having any shareholder protection in place. In May 2009 one of the shareholders in a successful family business died unexpectedly. There had been three shareholders, all brothers. The remaining two shareholders thought that they would simply carry on in business as normal, and as they were brothers, they had never thought that they would need any formal agreement in place stating what would happen in such an eventuality.
Unknown to the surviving brothers, the deceased and his wife had financial problems, and after inheriting her husband’s share in the business, she was determined to sell it in order to clear her debts. However, she was unable to find a buyer other than the surviving brothers, but still expected to receive the full market value. Unfortunately, the brothers did not have enough cash available to fund the purchase and the bank was unwilling to lend to them as the business had recently lost one of its main drivers.
The deceased’s wife, who had never been interested in the family business, or had any experience in running a business, is now entitled to her share of the profits and takes an active role in the decision making process, often at odds with the other shareholders views.
The mess could have been avoided with a little careful planning. Their independent financial adviser had previously advised them to take out life and critical illness policies along with a cross option agreement. This combination, had it been put in place, would have ensured that the proceeds would have been available to buy the deceased’s shares from his wife, solving her financial problems and allowing the surviving brothers to carry on the business as normal and in a way that they had do successfully over many years.
Speak to an independent financial adviser and make sure your business is adequately protected.
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