Protecting your business adequately is something that is often overlooked, and we are not talking here about insuring your company vehicles or machinery. Business owners will often simply focus on building profits. However, life has a habit of throwing a curve ball now and again. Key employees with vital skills can become ill and require time away to recuperate, shareholders can die unexpectedly, leaving the company in turmoil. Not only can this affect profitability, but it can also lead to an undesirable change in the ownership of the company and instability.
To help compensate for the above, Business Protection is available to partnerships (including limited liability partnerships), shareholders, sole traders, and key employees. Having a robust plan or ‘Business Will’ in place for your business, just as you would do for your personal affairs, can help ensure the long-term financial health of your business during difficult circumstances.
What are the main types of business protection?
Key Person Protection
Key people are individuals whose skills, knowledge, experience, or leadership are important to the continued financial success of your business. Whether your business is a Partnership, Limited Liability Partnership, Company or even a Sole Trader, it is likely to have an individual, or individuals who are crucial to its continued activities and prosperity.
Most businesses will have taken out insurance to cover buildings, contents, vehicles, and their employees for accidents in the workplace. However, few businesses have any insurance to cover the one eventuality that can literally mean the end of their business and the income it provides upon the death or illness of a Key Person.
By establishing a protection policy on the lives of the Key People within your business, you will be ensuring that cash is available at a critical point in time to allow your business to continue trading. There are no set rules regarding the amount of cover as this will be unique to your business, but it could typically include the recruitment costs of replacing an employee and loss of profits.
Many businesses take out substantial loans to start up a company or to expand their operation and their ability to repay the debt often rests on a few key people.
If a business owner dies or suffers a critical illness, lenders may have the right to demand that any outstanding loans are paid back. These could be difficult for the business to payback at short notice if there is limited cash in the company bank account. Even if the lender does not demand the repayment at that time, when it comes to renewing the terms of the debt, this could prove difficult.
Business loan protection insurance will provide the funds to repay an overdraft, loan, commercial mortgage, or a director’s loan (which are generally payable on demand) if one of the business owners dies or suffers a critical illness.
When a claim is made, the sum assured is either paid to the business or directly to the lender if the policy has been assigned.
Many of us have a Will to ensure that if the worst happens there is a clear record of our wishes regarding our financial and other material assets.
Fewer people realise it is equally important to leave clear and concise instructions of your wishes if you should die or have a serious illness whilst running a business. In the event of the death or serious illness of a business owner, concerns are likely to be raised by family members and business partners alike.
Your family may ask
- Do I want to inherit a share in the business?
- Will I be forced to work in the business, like it or not?
- Who can I sell the business share to?
- What price will they be willing to pay me for my share and will that be sufficient to give me financial security for the rest of my life?
Your business partners may ask
- Who will inherit the business share?
- Will they want to work in the business, whether I like it or not?
- How can ensure that I would have sufficient cash to buy the shareholding?
- What price will I need to pay?
In most businesses the remaining shareholders or partners will want to retain control of the business and the family members, as beneficiaries, will usually want to receive the full cash value in exchange for their inherited share of the business.
To ensure the best outcome for your business and your beneficiaries, it is prudent to put a ‘Business Will’ in place. This is a legally binding agreement which outlines the why’s and how’s of what will happen to your share of the business in the event of death or serious illness, and this will consist of 3 elements:
- An agreement as to how the transfer of the business share will take place
- A mechanism to provide the money to allow the shares to be bought
- A way in which the transfer can be arranged in a tax efficient manner
By setting up an agreement in advance the owners of a business can be sure that the surviving shareholders/partners retain control of the business, the family receive a payment of ‘fair value’ for their share in a tax efficient manner and the family are not forced to join the business or the business to accept them as owners.
Working alongside your accountant and solicitor, we can help you create a ‘Business Will’ that meets the specific needs of your business and ensures that everyone gets what they want.
Executive Income Protection
Executive Income Protection can help businesses by providing essential cash to help cover costs in the unfortunate event of an employee being incapacitated and unable to work. Cover can include the employee’s earnings, dividends, P11D benefits, employer pension contributions and National Insurance (NI) contributions.
In the event of a claim due to incapacity, resulting from illness or injury, an Executive Income Protection plan would pay the selected monthly benefit to the business which can then be used to pay the employee’s sick pay. This will give the employee peace of mind knowing that they are able to meet their regular outgoings rather than having to rely on savings, other family members or state benefits.
Relevant Life Plan
A Relevant Life Policy is a tax- efficient alternative to a ‘death in service’ benefit that allows you to pay your key employees’ family a cash lump sum if they die whilst being employed by your company.
They are more commonly used for employees or directors of a limited company. There are however some exclusions including sole traders or equity partners where they are taxed under Schedule D.
They can also be a suitable alternative to a ‘Death in Service Scheme’ for smaller businesses that do not have enough members for a group scheme but still want to offer excellent employer benefits, high earners who do not want their group death in service benefits included in their lifetime allowance or employers looking to top up their benefits that they receive from their employer’s scheme.
The policy is taken out and paid for by the company and to be tax efficient for both employer and employee, the policy must be placed in trust.
The way forward
How these arrangements are set up will depend on the structure of your business and particular requirements. Here at Menzies Wealth Management, we are able to conduct a thorough risk assessment of your business, including identifying the key people in your business and how their absence may affect profitability, details of any outstanding loans, plus understanding the structure of your business. We will then provide you with an indicative cost to put your plan in place to ensure it fits within your budget before providing you with a more bespoke report.
We will then work with you to put the recommended cover in place to meet your specific business needs and then help you to ensure your cover remains adequate as your business grows.
For help in planning and implementing your ‘Business Will’ or any other aspect of Business Protection please contact Erica Miller on 020 7465 1942.
The information provided is for general information only and is not intended to address the particular requirements of an individual or business. It does not constitute any form of advice or recommendation by Menzies Wealth Management Ltd and should not be relied upon by individuals in either making or refraining from making any financial decisions. Where necessary, you should seek appropriate professional advice before acting on any of the information provided.
Menzies Wealth Management is authorised and regulated by the Financial Conduct Authority (486548). Registered address: 1st Floor, Midas House, 62 Goldsworth Road, Woking, GU21 6LQ Registered in England and Wales 06597008.