“IT is found that anything that can go wrong at sea generally does go wrong, sooner or later . . . ”
This wisdom comes from a report by a boatbuilding engineering company, written in 1877.
Sound familiar? That’s because it’s one of the earliest versions of what we now call Murphy’s Law, which more succinctly states: “If anything can go wrong, it will go wrong.”
This cheerful sentiment should be framed and hung on every office wall – particularly if you are a smaller business.
According to the Department for Business, Energy & Industrial Strategy, there are 5.5 million private sector businesses in the UK. Of those, 65 per cent have some form of business debt, and 92 per cent of them have three owners or less. We are a nation of small businesses.
The insurer Legal and General has surveyed large numbers of these small businesses, and found that over half (53 per cent) agreed they would probably cease trading within a year, if the principal of the business were to die or be forced to stop working through critical illness.
Bearing Murphy’s law in mind, wouldn’t it make sense to protect your business against such eventualities?
To reduce the risk of your business going bust, there are a number of insurances that shelter the business from financial risk, should some adverse event come to pass. These come under the general heading of ‘business protection.’
Despite the obvious risk of not being covered, over half of UK businesses have no form of business protection insurance. This is partly for cost reasons, but often simply because they have never paused to consider the ‘what if’s.’ There are enough challenges in running a business on a day to day basis, without spending time setting up insurance, right?
Well it’s right until something goes wrong. As Murphy would point out.
What if the owner of the business suddenly died? What if there were considerable company debts to repay? What if the majority shareholder was diagnosed with a terminal illness?
Most of us fail to expect the worst - and Murphy does not approve.
Legal and General found that smaller and younger companies are the worst offenders, as they are more unlikely to have business protection. Sole traders appear to be most vulnerable, with nearly half (48 per cent) having no cover, followed by all-female businesses, of which 42 per cent have no cover.
At the same time, 41 per cent of business owners have personal life insurance, protecting them in family life, but haven’t done the same in the business.
Business protection is so essential because it can help your company continue to trade if an owner or other key person dies or becomes terminally or critically ill. Proceeds from a business protection policy could help ensure that key individuals are replaced, debt is protected and, in partnership situations, shares from the deceased partner’s estate are purchased.
Let’s consider the three main business protection insurances.
‘Business Loan Protection’ is designed to help in the event of losing a person who has guaranteed a loan. A sum equal to the outstanding debt can be paid to either the business, or directly to the lender.
Then there’s ‘Key Person Protection’ to cover the company against financial loss when a key person dies. The policy can also cover against critical illness. The key person might be the managing director, finance director, or sales manager.
Quite often the loss of a senior person can also mean the loss of important business contacts, or can affect the confidence of customers in continuing to deal with the company. All of these can lead to financial challenges.
The third insurance worth considering is ‘Share Protection’, and is particularly important in partnership situations. It enables the remaining partners or directors to keep control of the business following the death of a business owner, by buying that owner’s share.
Without share protection insurance, if the company were unable to buy the deceased owner’s share, it could pass to his or her family. They might then choose to become involved in the running of the business, or even sell their share to a competitor.
Despite these dangers, L&G found that over half of directors have left no instructions in their will, or made any special arrangements regarding their share of their business.
The good news is that, of those who do have business protection in place, 84 per cent were given advice by a financial adviser. Once business owners are made aware, they tend to see the benefits of protecting their business and their livelihood.
So make Murphy happy. Think about protecting your business today!
:: Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 71886005. Further information on Facebook at “Kennedy Independent Financial Advice Ltd”