What is the most important asset in your business? Or should that be who?
What would happen if one of your key employees suffered an illness or a premature death? Would there be financial implications in the day to day running of your business?
Or what would the financial consequences be if you suffered a premature death or illness? How would the value in the business be passed to your family?
I am sure that your premises, machinery, tools, computer systems, mobile phones and vehicles are all insured but what about you and what about your key employees?
The people in your business are important especially in small and medium sized companies as the success of the business can depend on one or two people. Unfortunately, life does not afford us the luxury of having a crystal ball and we have no idea what lies in wait around the corner. That is why Business Protection is vital. We can’t predict the future, however we can have the proper protection in place to keep the business running if a key person suffers a premature death or a critical illness. Plus, it’s vital to have the correct measures in place to make sure that a shareholder is able to pass the value of their shares to their spouse and the remaining shareholders or business is in a position to purchase the shares.
The two main types of Business Protection are Key Person Insurance and Shareholder Protection. By not having the correct protection in place you could risk everything you have ever worked so hard to achieve.
Key person insurance – this type of protection is used to provide cover should a key person die or suffer a critical illness which may result in a loss of profits or an unexpected expense such as recruitment costs. A cash sum is paid to the business to allow it to continue trading. The key person could be you or a key employee.
Shareholder protection – in this case the owners of a business receive a cash sum to purchase the share of a company shareholder who has died or suffered a critical illness.
Let us look as how Business protection works in practice:
Trevor is a shareholder in a marketing company along with Mike and Julie. All three are equal shareholders and married. Their business is valued at £1.5 million.
Sadly, Trevor suffers a premature death and his shares are transferred to his spouse Helen. Here are the 3 main reasons protecting your business is so important:
- Helen has no interest in the business and does not want to be involved. Trevor was the main sales consultant and the business now needs to find a replacement.
- Helen requires the value of the shares to help financially support her and her family.
- The business does not have sufficient cash to buy the shares from Helen. Whilst Mike and Julie are not in a position to do so either. As Trevor in his capacity as sales manager was instrumental in the profits of the company there is an immediate loss in earnings plus the added cost of recruiting a replacement.
However, had Trevor been protected by Key Person Insurance the business would have a cash injection to replace lost profits and finance a replacement.
By having Shareholder protection in place, written in a business trust with a cross-option agreement in place, the business/ shareholders now have the funds to buy the shares from Helen and the cross-option agreement ensures that there is an obligation to sell the shares and an obligation to buy them.
Sadly neither of these protection plans was in place and in the end Helen sold the shares to a major competitor!!!
We remain passionate at AGL about face to face financial advice and the benefits of long term relationships with our clients as trusted advisers. If you’d like to know more, do get in touch. You’ll find our contact details here.
Allan Stobo, Senior Corporate Manager
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