Business Protection – What Does It Really Mean?

Many deals are completed, conversations had, risks assessed but then there is very often a lack of follow up action taken with regards business protection. In many instances, this will come down to short-term cost (premium affordability) versus the long-term cost (business sustainability, financial protection) and an understanding as to the importance of the protection.

People are quick to insure cars, homes, pets, mobile phones, holidays…in truth the list is endless about what we are prepared to protect. What is therefore surprising is many successful business people are willing to take a risk with their biggest asset by failing to protect the most important aspect of the business, themselves!

With several options out there, it is important to consider how best to protect your business.

Shareholders Protection

Any form of any succession planning should include shareholders protection. Without this valuable cover in place, businesses can quickly find themselves in difficulty. Should the worst happen to one of the businesses shareholders or partners, it could all be put at risk if the value of their shareholding passes to their spouse or family. The new shareholder may have no business knowledge or interest in being involved in the daily running of the firm. This then leaves the Company with the unenviable task of either finding the funding to purchase the shareholding or having to work alongside a business partner who may not add any value to the business and yet will still be expecting to receive dividends from it.

Alongside a legal agreement, shareholder protection insurance can provide the level of funding to ensure the remaining partners or directors have the right to purchase the deceased’s shareholding. There are various ways the legal aspect and policy set-up can be structured but perhaps the most common will be the use of a cross-option agreement with the policy written on an own life basis put in trust.

Key Person

Not all business owners will be the most vital cog in the workings of their firm. Very often other ‘Key Employees’ may be responsible for large elements of revenue or client relationships that could falter if they were to be off long term sick or pass away.

To help protect the business, Key Person insurance is often the most suitable policy as this can provide a lump sum or an income that the company can use to help them through a challenging period. In the event of death, key person cover may simply help fill a void of lost income or be used to help recruit and train a replacement employee. The plan will usually be set up and owned by the firm on a ‘life of another’ basis however there are other circumstances where a different structure and the use of a trust may work better.

In order to protect the business against the loss of a key employee it is necessary to attach a financial value to the contribution to the business of that individual. There are various methods used to calculate the value such as; loss of profit; proportion of payroll; actual impact, although this can prove to be a very difficult process for a business to understand and agree on, but they should remember there is no hard and fast rule as to which method works best.

To answer the original question, what does it mean? Well, business protection really means peace of mind so that the hopes and aspirations of directors and partners can continue to be achieved.

Should you be interested in further information regarding Key Person or Shareholders protection then please contact Richard Petrie, Employee Benefits Senior Manager or your usual AAB contact.