FOLLOWING on from last week’s column, I spoke to a number of business people who were unaware how their business was protected and how to protect it. The revelation of tax relief on life insurance came as a surprise.
For many business owners, the business starts out as a ‘good idea’ you are passionate about, and evolves into a very different bucket of frogs, with skills required we often didn’t know existed.
Then, you are full steam into the project you have spent so much time and money invested into.
If it’s busy you are busy, and if it’s not busy, you are busy trying to make it busy. Either way you are busy, often at the expense of personal and family lives.
But how do we protect such an investment given its value and impact on our family? There are numerous ways to do so.
To protect the company (which in turn protects your capital to go to your family), you should just think through what would happen in the event of a death, or even a serious illness.
Consider the relevant life policy we referred to last week. You receive tax relief on the premiums, and no tax on the pay-out which also avoids inheritance tax. This money goes to the family not the company.
If there is a loan, it should be protected for the term of that loan. It’s highly probable lenders would call in the loan should they be concerned about the continued success of the business.
Some say its 82 per cent, others say its 90 per cent, but cash flow is the prime reason businesses fail.
In the event of a death, you may well expect invoices to be demanded very quickly and others won’t be so quick to pay you.
Witness the plight of Taylor & Sons whose 134-year-old business went down the drain after Companies House confirmed Taylor and Son (no ‘S’) went into liquidation.
The result was a queue of creditors asking for repayment, and credit withdrawn across the board. The company never survived, and sued Companies House for £8m – a drop in the ocean after 250 people lost their job.
And so, a simple protection of any loans, plus cash to support the business during any upheaval, seems a sensible way to protect the asset your family should benefit from.
Another form of protection is key person insurance. If you had a member of staff who was vital to the business, how would it cope as you looked to pick up on their work, understand the extent of their work, and find a replacement?
The company insures the key employee and benefits are paid to the company directly to cash flow the business through tough times.
Another form of cover is partnership protection, or share protection.
So, you have a key person within the firm who has shares, and they pass away. How will the firm now cope? The shareholder’s family may inherit the shares according to his will, but may not want them.
What value will they receive for them, as the firm is now under pressure with a reduced key member of staff, as well as the need to replace them?
Similarly, the firm may not want to have the surviving spouse as a shareholder. As we all know, money and power changes people’s attitudes, and it is best to protect against that.
A life insurance policy is set up for the value of the shares of each shareholder. Wrapped around that is a legally binding agreement.
This agreement ensures that if a shareholder passes away, their shares are made available to repurchase by the company at full market value. The company has insured the individual and as such will have the cash to do so as it’s paid to them.
The above agreement ensures that if either the company, or the surviving spouse decide to exercise the agreement the other party has to do so to.
Ask your independent financial adviser for a quote as the costs vary wildly between providers.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For a quote or advice on protecting your business call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit www.wwfp.net
