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Could your business survive without you?

No matter what size your business is, or how modest you are as an owner or Director, you are very likely to remain the lifeblood behind it. How would your business cope if you suddenly couldn’t give it your undivided attention?

Sadly, for Portishead based Cuddy Group, it’s Director Mike Cuddy and their 372 employees, they discovered the answer the difficult way when Mr Cuddy was taken ill: He spent six months in hospital and a further 18 in recovery at home, after being diagnosed with a rare neurological disorder.

Shortly after Mr Cuddy fell ill, the Group fell into financial difficulties. Against medical advice, he returned to work in April this year, six months earlier than planned, to improve the situation. Despite this, and after injecting personal funds, sadly the company fell into administration.

Devastating news for the business and its employees; nobody could have predicted the circumstances, but what can be done to mitigate the impact of such a vital figure falling ill? Hopefully, to reduce the likelihood of a similar situation elsewhere, here are our humble suggestions:

Key person protection

Commonly known as keyman insurance, it is cover taken out by a business to compensate for the financial losses that would arise from the death, critical illness or extended incapacity of a key member. The absence of such a person could result in a loss of profit, turnover, time, or the disruption of ongoing activity and development plans.

A key person doesn’t have to be a Director like Mr Cuddy; key people are anyone whose knowledge, experience and overall contribution are considered uniquely valuable to the business’ success. Examples include, but are certainly not limited to:

  • Company directors
  • Sales directors
  • IT specialist
  • Managing directors
  • Heads of product or service development

The business pays the premiums and will also receive the remuneration of a claim. The most basic policies will pay out on death only, while more comprehensive options will provide a critical illness element for more serious conditions.

When it comes to calculating the level of cover required there are two typical methods; profit or salary based:

  • An example of profit-based cover would be five times net profit the key person brings into the business, or two times gross profit, depending on the nature of the business.
  • When Salary is a good indication of the revenue an individual would bring in, it may be appropriate to use it as a multiplier for the level of protection; such as up to 10 times gross income.

Other factors have to be considered, including replacing the key person should they die and recouping lost profits in the meantime. Key person protection policies can be complex; if you’d like to discuss the options for your business, please get in touch.

Shareholder and Partnership protection

The death of a business owner can quickly weaken operations and lead to financial struggle. Shareholder and Partnership Protection means if the worst does happen, the remaining Partners, Shareholders and Directors can stay in control of the business.

In the event of a business owner dying or becoming terminally or critically ill during the policy term, Stakeholder and Partnership protection will provide a lump sum to the remaining owners to help maintain daily activities.

Relevant Life protection

A Relevant Life plan is a type of term assurance available to employers to provide an individual death in service benefit for employees. It is designed to pay upon death or diagnosis of a terminal illness during their employment.

Set up and paid for by the employer, a Relevant Life policy pays a tax-free, lump sum directly to the employee’s family or financial dependants.

An emergency fund

As well as insurances, when giving personal financial advice it’s good practice to recommend the equivalent of three to six months expenditure saved as an emergency fund. Business expenses may be more difficult to predict than personal spending, but the principle remains the same; a rainy-day fund could prove invaluable in these circumstances. Realistically consider the cash demands of your business and make sure key employees know that it exists and what it’s to be used for.

Planning for every eventuality

As a business owner, making provisions should you become ill or pass away is very prudent; there are too many real-world examples like the Cuddy Group where businesses fail in circumstances that might have been avoided with some financial protection.

Two very different, but equally relevant areas considering your business’s success, are making an exit strategy and efficient tax planning. In this light, we are running a seminar on 5th September called ‘Tax and Exit Planning for Business Owners & Entrepreneurs’, details of which can be found here, we would love to see you there.

If you would like to attend this free event, please get in touch with Sally at sjp@sovereign-ifa.co.uk. Places are limited, and it’s a first come first served, so if you are interested don’t hesitate to get in touch.

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