One of the more important business activities of any company owner or partnership is the whole area of risk management. Yes of course you have the day-to-day challenges of bringing your products to market, selling, building your brand and your presence, and meeting and exceeding the expectations of your customers through your product delivery.
Sitting behind these are the important tasks of running the financial side of your business, getting the best people in place and running your business efficiently. And then there’s risk management, in case anything goes wrong.
So how well is your company protected?
What do you think about when you think of something “going wrong”? Is it a fire in a warehouse, an accident involving a company vehicle, maybe somebody tripping and falling in one of your retail outlets? Is it someone suing you for poor performance in your business activities? These are all areas where businesses build contingency plans or put insurance in place.
But one area that sometimes slips under the radar is the potential impact to your business or partnership if something happens to your most important assets. Your people. We want to make you aware of the different strategies that you can put in place to safeguard your company against the death or inability to work of one of your key people.
People who are engaged in a professional partnership, such as solicitors, accountants, medical professionals and others who work together outside of a company structure need to consider what would happen in the event of the death of one of the partners in the firm. Because on death, the deceased partner’s share of the firm immediately becomes part of their estate, which could be called upon as a debt by the deceased partner’s survivors. This potentially could create enormous issues for the remaining partner(s) who would need to immediately raise finance (if they can) in order to buy out the deceased partner’s share. Of course the alternative is that a deceased partner’s family member could instead become involved in the firm instead, this being a real potential recipe for disaster!
BDO Simpson Xavier released the sobering statistic that 72% of businesses cease trading within 5 years of the death of business’s founder, often because the remaining partners simply don’t have the financial firepower to compensate the deceased partner’s estate and keep the business going forwards.
Thankfully partners can protect themselves against this risk. Each partner can take out partnership insurance on the lives of their partner(s). Should one partner die, the remaining partner(s) now have immediate access to the necessary capital to buy out their deceased partner’s share of the firm. The deceased’s family are looked after and the firm can continue to grow.
This is similar to partnership insurance but in a company context where there are directors in the business who are shareholders of the business. When there is Co-Director Insurance in place, in the event of the death of a director, the remaining directors (or the company itself under a Corporate Co-Director’s Insurance policy) can buy out the shareholding of the deceased director.
This prevents a deceased director’s family having to become involved in the business, where they may have no desire or experience to do so. This insurance also enables the company to control it’s own destiny, should such an unfortunate and unforeseen event occur. The deceased’s family are fairly compensated and the remaining directors retain control of the ownership and direction of the business – a best-case scenario for all concerned.
Key Person Insurance
It’s not at all unusual to have one or two key people in a business, who are not shareholders in the business. They may simply be exceptional employees with unique talents or expertise that the business relies upon heavily. To lose such a person would be like cutting off a limb, and may even threaten the very future of the business, as their input is so key.
Businesses can protect themselves against the loss through death or illness of such a person through a Key Person Insurance policy. These policies enable the business to survive such a loss, by providing a cash lump sum for the business. This may give the business time to hire required replacements or to pay down some debt as they adapt to life after their deceased colleague. This insurance might prevent a business imploding after the loss of a key person.
Yes it is important to protect your physical assets, your premises, your vehicles and your stock and to ensure you can adequately manage any other potential liabilities. But your people are the very heartbeat of your business. Don’t let losing them lead to the death of your business.
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