Is your business prepared?

Andrew Carnegie, the American industrialist and philanthropist, once said “men and women, not machines, are the real source of profits in any business”.

Interestingly, whilst business owners insure their equipment, buildings and cars, most have not considered, or are not aware, that they can insure themselves and key personnel within their business against death and critical illness. The proceeds from such a policy could help the business continue trading, if the worst were to happen.

According to research from Legal & General, if a key person died or became critically ill, four out of ten businesses would cease trading within one year. Despite the risks, it is smaller companies that are least likely to have business protection insurance in place, and yet they are the very businesses who may be in most need of this type of cover. There are various types of business protection insurance available: business loan protection, share protection and key person protection. It is important to seek advice from a financial adviser who specialises in business protection to make sure you get the correct cover for your business requirements. For this article I am going to focus on share protection.

When considering share protection, it is essential that the company has a shareholder agreement in place, click here to read more.

What is shareholder protection?

Shareholder protection is an insurance that pays out on death and can include critical illness cover. It pays out a lump sum to enable the remaining business owners to buy back shares. Each owner takes out a life assurance policy equal to the value of their shares in the business, it is written in trust, often via a cross option agreement, for the benefit of the other business owners. The cost of the insurance will vary between the owners, depending upon their age, health and other factors.

A share purchase agreement will be signed, which is a legal document detailing how the shares of the business can be bought and sold. If one of the business owners dies or is diagnosed with a critical illness the insurance policy pays out, providing sufficient funds for the other owners to buy the remaining shares.

Business owners should also consider their wills. A discretionary trust is an invaluable tool under a will for business owners, which Tim Ogle refers to here. 

Legal & General’s research reveals that the top reasons for businesses not having this protection are:

  • 32% of business owners have not heard of it;
  • 31% have not got round to it; and
  • 28% have deemed it too expensive. 

With the possibility that a business could fail within a year of the death of a key person/business owner, can this cover be ignored?

It is important for your business to carry out an audit from time to time to make sure you have all your legal agreements and insurances in place, and that includes insuring YOU.

At Birkett Long we offer joined up advice from our independent financial advisers and solicitors regarding your business arrangements.

If you would like to discuss any financial issues affecting you or your business please do not hesitate to contact me on 01206 217309 or alternatively email me at nicola.ward@birkettlong.co.uk.