Business Protection

4 September 2009

Managing Director, Worldwide Financial Planning, Writes:

Business protection is easily one of the most passed over subjects in any company.

The business owner is too busy either making hay while the sun shines or battling in recessionary times to look at one of the key areas that can cripple even the most successful businesses.

There are three key areas of protection in a business: Succession planning post the death of the owner; protection in the event that a key person dies, and debt protection.

Let's look at the first – Succession planning post the death of the owner: Far too many businesses don’t even have a business will. A business will makes it clear what should happen to the business when the owner dies. Without a business will, a business that has built up quite a value over the years can easily become valueless.

The lack of direction after a death can cause fear within staff and customers, and competitors can soon seize that opportunity to move in. A considerable percentage of value can be wiped out in months. The key is to have the correct instructions and protection in place to avoid financial catastrophe.

For example, surviving business partners could find themselves with the spouse of the owner as their partner, a role they mightn’t be particularly hot on. Furthermore a surviving spouse who does not want to run a business that has been forced upon them, and is subsequently in a hurry to sell that business, is likely to get much less than one who is not.

Owners or shareholders should set up the correct business protection so that the surviving partners/shareholders can buy out the deceased's shares. This should also be set up with the correct legal agreement such as a double option agreement that allows either party to buy or sell the shares in the event of a death.

The value of the shares are calculated now and regularly reviewed. Each partner is insured for the value of their shares at that point and on death the insurance death benefit passes immediately to the survivors to execute the purchase of the remaining shares. It is a simple task that takes very little time to put together yet it is surprising how many businesses procrastinate on such a simple method of planning.

Be sure to use a specialist independent financial adviser however, as the legal agreements, if set up incorrectly, could mean that an inheritance tax situation is created, and furthermore the death benefits could become taxable. If set up correctly the premiums on the life insurance plan can be tax deductible.

Protection of a key man is simple. The business insures a key member of staff for any financial loss should they die. The death benefit is used by the firm to cushion the financial impact of the key person’s death on the business whilst they replace the key member of staff.

Debt protection is the third area of business protection which can be overlooked. This is normally the insurance that the bank adviser forces down your throat when you are asking for any business finance.

Ensure your debt is covered in full in the event of death (and critical illness if you can afford it) and use a fee based independent financial adviser to acquire the cover. The premiums will be much cheaper than those offered by banks’ products direct. You pay too much in excess interest and charges to banks to allow them the luxury of selling you life insurance for hefty commission.

Remember the age old practise of offering you a loan on condition of life cover is not acceptable in the eyes of the FSA, a trick far too many fall for.

On death, a bank may have the ability to foreclose on a loan, and if the business is not in a position to repay it, the banks' options are much more favourable than the business'.

If you have a business protection query call Peter on 0845 230 9876, e-mail info@wwfp.net

Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.