No one likes to think about illness or death; however they are a fact of life and can strike at any time.
Many of us make arrangements that will ensure our families are financially secure should we die prematurely or become ill, but less think about the consequences for our businesses.
So just what would happen?
If I die prematurely
If you work on your own the business is likely to stop trading. Could your beneficiaries sell the business? If the business has assets or a client base this may be possible, however in many instances when you work on your own ‘you are the business’ a sale to realise value therefore may be hard to achieve.
Alternatively let’s imagine you don’t work alone and work with a business partner, each of you own equal shares; what happens on your, or your business partner’s death? Well, without proper planning your shares will end up in your estate and often in the hands of a spouse. No problem you may think, but what are the consequences of this:
- Your spouse is left with shares in a business that he or she may have no interest in running
- Your business partner is effectively in business with your spouse, which may or may not be attractive
- Your business partner would have to find the necessary funds to buy the shares from your spouse at an agreed price
Not ideal? Well, there is a solution, plan for this eventuality using Share Purchase Agreements backed up by a simple, and often less costly than you might imagine, life cover policy.
This type of arrangement works very simply:
- A life assurance policy is taken out for each shareholder to cover a specified amount representing the approximate value of their shareholding
- A written legal agreement, known as a Cross-Option Agreement is put in place which gives the remaining Directors the right to buy the shares and
the inheriting spouse the right to sell their shares to the Directors.
So, what is the effect of this planning should you or your business partner(s) die? Shares end up in the hands of the other directors giving them control of the business. Cash is paid to the spouse, dependents or estate of the, now sadly deceased, director; giving more options than if shares were held.
But is this complicated and expensive to set up? It doesn’t have to be, obviously the premiums for the life assurance will depend on age, state of health and other lifestyle issues and a Solicitor will be needed to set up the legal agreements. However the total cost doesn’t have to be excessive and is often better than the alternative!
Does your business have debt? Again this can be protected in the event of your death to ensure that it is repaid, giving you and your business partners peace of mind.
If I become ill
Would you say you were key to your business?
Most of us would agree with that statement, therefore if you are indeed key it is likely that your business would be financially less sound, or even fail completely, should you be unable to work for a significant period of time due to illness.
The solution? Key person protection.
Key person protection can provide cover for you should you be diagnosed with an illness and can do two things:
1. Protect the business against the loss of a key person by providing funds to replace them
2. Protect your income so that your family continues to be financially secure
Payments can be in the form of a lump sum or an income and you can choose the level and duration of cover which suits the priorities of your business, plus you can increase or reduce these at any time.
Remember, you might not be the only person key to your business, is there someone else, perhaps a fellow director or senior manager who is key to your success? Key person protection could be used in the same way, to help cover the cost of a replacement, whether short term or temporary and help to maintain their earnings.
Again, if your business has debt you can also provide protection in the event of illness to ensure that it is either repaid or monthly instalments are kept up to date.