Introduction to Business Protection
Proper contingency planning is a process which can make a business more robust in the face of a serious unforeseen or challenging event, which could pose a threat to the business. Business Insurance, which comes in many forms is an essential component of the prudent contingency planning of a business. Insurance is both, by law and necessity at the forefront of the majority of business owners priorities, be it, insuring the business premises, vehicles, or other physical assets such as stock and equipment or insurance to protect their staff or customers in the event of accident or injury. The concept of damage or loss occurring to these assets in the absence of a protective provision, to provide compensation would be unimaginable for many, business owners/partners. These assets must be insured and these events protected against. Insuring these assets is often seen as a very initial prudent step of business competence.
However, what about the businesses’ human assets, what about the owners or partners or key employees? Has the potential shock to the business been calculated or prepared for in the event of something happening one of the owners or key employees? Has the scenario which would unfold if a partner passed away without the appropriate estate plan in place been envisaged? Business Protection involves prudent contingency planning by insuring against these risks. Ireland is full of small to medium size businesses, yet there is a distinct lack of properly formulated business protection in place, this means a firm and it’s direct and indirect stakeholders may be exposed by a lack of insurance and contingency planning, if something were to happen to an owner or key member of staff.
Within this piece, the discussion will be framed around 2 distinct areas of Business Assurance.
- Co- Ownership planning, the recommended business protection for a co-owned business or partnership. Putting the structures in place to protect all of the businesses stakeholders where a business is co-owned or a partnership, in the event of one of the partners passing away. This means putting in place a contingency plan to protect the surviving partner and family of the deceased partner, it is a holistic plan to protect the various stakeholders of the business both internal & external.
- Keyperson Cover – Insuring the key human assets of the business. This involves the company putting a plan in place to insure key employees and the business against the financial consequence of losing such an employee, through them passing away or even becoming seriously ill.
These are different conversations which both, come under the umbrella of Business Financial Planning. When a person is a co-director or sole owner of a business, they can approach financial planning through 2 lenses assembling a personal financial plan and a financial plan surrounding the business. The latter usually centres around key areas of pension/retirement funding through the company or corporate saving or having the company pay a policy to protect your income. These are all excellent financial planning benefits of owning or being a director in a company.
However, an area often overlooked, is the risk management planning of the business. As mentioned above this will almost always be executed and in place when it relates to physical assets, however has the legacy of the business been insured or planned for? What is the scenario, if a co-director/partner passes away. What affect would that have on the ownership of the business and stakeholders or the projected success of the business or workload? These are the questions the following abstract seeks to answer and show a road map towards prudent contingency planning around the human assets of a business.
Co-Director/Partnership Protection – Protecting all the Stakeholders of a Business
The easiest way to explain how a Co-Director/Shareholder/Partnership Protection plan would operate is through a case study approach.
In the scenario mentioned above:
- There are 2 Co-Directors, A & B. They’re both married with a family. They own the business equally. The value of each of their share is 200,000.
- Co-Director/Shareholder Protection/Partnership is put in place in the following way. A life assurance policy on each shareholder worth 200,000 is put in place. The company pays the premiums and is the beneficiary of the policy.
- In the case of the death of shareholder/Co-Director A for example. A’s share passes to his/her spouse. The life assurance policy pays out to the company. This policy is to be used to buy B to buy back A’s share from his/her spouse. The life Insurance provision provides the capital to facilitate this transfer.
- A Buy Sell Agreement is signed when the policy is set up. This means the surviving shareholders are legally obliged to buy the share off the spouse and the spouse is legally obliged to sell. This Agreement is the glue which holds together the business protection arrangement.
- This means that the spouse has been compensated for their deceased spouse’s share in the business and the surviving shareholders have retained control of the business. The protective provision has meant the parties are prepared for the risk if it occurs.
- The life policy taken out by the company on the deceased co-director provides the necessary capital and the Buy Sell Agreement legally binds the arrangement to allow this process to transpire in a seamless manner, at a deeply emotional and turbulent time. Both the business and family of the deceased shareholder are protected.
- It is vital that when this policy is set up it is regularly reviewed to ensure that the policy in place on each co-director/partner the sum assured reflects the value of their share in the business. This is imperative to maintain the plan as fit for the purpose intended.
- A properly formulated Co-Director/Partnership Protection plan provides both Family and Business Protection and peace of mind that a contingency plan is in place. As outlined above major issues can arise if a co-director/shareholder passes away and there is no Business Protection in place. It can threaten both the family of the deceased and the legacy of the company.