You and Your Business – Are you Protected?
The entrepreneurial spirit continues to be alive and well in Ireland. There are many successful businesses, some established during difficult recessionary times and others passed on from one generation to the next.
Business owners face daily challenges and risks in running their business. Risk management has always been a key component to running a successful business. In any economic environment, an unexpected event such as the recent Covid-19 pandemic, can have a significant impact on a business if the right risk management strategies are not in place to prevent or at least mitigate the risks.
Business owners protect their physical business assets by having the required insurances in place. However, the protection of the human assets is often overlooked. Unforeseen issues can arise for a business on the death or ill health of a business owner or key employee. Prudent contingency planning for these events is as important as protecting the physical business assets.
Key Person Protection
There are key players in every company that can include the owners and key employees. The death or serious illness of one of these key players could have a devastating effect resulting in a reduction in sales and profits, and the loss of stakeholder confidence in the business. The repayment of borrowings might also be triggered.
An effective solution for a company is to arrange key person life cover and serious illness cover on the life of each key player. On the death or serious illness of the key player, the company receives a cash injection from the policy proceeds. The amount of cover required will be determined by factors such as estimated loss of profits and/or repayment of borrowings.
Another key business protection solution is partnership and shareholder cover. Today I will focus on company owned shareholder protection specifically. The death of a shareholder in a private company can cause issues for the surviving shareholders and the deceased shareholder’s next of kin.
Issues for the business owners:
- Loss of control for the surviving shareholders if the deceased shareholder owned more than 50% of the business
- The deceased shareholder’s next of kin might refuse to sell the deceased shareholding to the surviving shareholders
- The deceased shareholder’s next of kin might want to join the business with little knowledge of the business
- There may be insufficient liquid capital to buy back the deceased’s shareholding. That could result in the deceased shareholder’s next of kin selling the shareholding to an outside party. If sold to a competitor, it could cause severe repercussions for the business.
Issues for the next of kin:
- If the shares are not sold, the next of kin could have an asset producing little or no income
- What happens if the company constitution blocks the sale of the shares to an outside party? This might force the sale of the shares to the remaining shareholders at a lower price if no other offer is available.
Life cover can be arranged on each shareholder’s life, providing a great, simple solution. The policy would essentially create liquid funds that will enable the surviving shareholders to retain control of the business through the buy back of the deceased’s shareholding from the next of kin. The next of kin receive a cash payment for the value of the deceased’s shareholding.
This cover ensures that the necessary funds will end up in the right hands at the right time! The cover required for each shareholder is determined by the value of their shareholding in the company.
Protecting the human assets in a company is a vital component for its continued success. The area can be complex, but we can deliver some simple solutions to manage risk. It makes sense to have the necessary covers in place to ensure the business will survive.
If you would like to find out more about business protection insurance, please contact Josephine Cussen at JCussen@invesco.ie or at 087 7724664, or speak to your Invesco consultant.
By Josephine Cussen
Senior Financial Planning Consultant
Josephine joined Invesco in 2019 following the acquisition of City Life, having worked with City Life since 2003 where she became a director. She has over 20 years’ financial advisory experience. A Certified Financial Planner™, Josephine specialises in technical solutions for pension savers as well as advice on all aspects of financial planning, including bespoke investment strategies and risk management.