FOLLOWING last week’s column on how to protect/insure yourself and particularly if you have a business, we had a number of calls asking how a business is at risk if there was a death of a key person/owner.
Being a business owner carries its never-ending responsibilities. When your friends are relaxing, you are still thinking if the bills have been paid; if the doors were locked and alarm set; could the problem you have just seen whilst out of work be turned into a solution that could create more revenue for you?
Indeed over a third of small medium enterprise (SME) business owners work over 50 hours a week, and that doesn’t include headspace time.
With so much time invested into this business asset, why is it so many fail to protect it in the eventuality of a death?
I suppose it’s somehow getting that task on to a list of things to do when the priority is either fishing when the fish are there, or searching for the fish when they are not.
That doesn’t negate the issue however, that an asset so valuable, that would almost certainly pass to surviving children free of inheritance tax under the Business Property Relief, is at risk of being worthless, after all its creative construction.
Consider that 53 per cent of SMEs believe they would cease trading if they lost a key individual. Have they protected against that?
The staggering research shows that just over 40 per cent of businesses have some form of personal protection insurance, meaning of course that twice as many don’t.
The problem is exacerbated further when you see the average business borrowing of £176,000, and a third of those businesses do not have this covered in the event of death.
That loan would almost inevitably be called in by the bank in the event of death which would be the end of the business already having lost the leader and owner.
Astonishingly, 75 per cent of those who didn’t have loan protection, hadn’t even considered it.
Furthermore, many who have built up a Director’s Loan Account do not realise that would have to be repaid in the event of death.
Research shows that it is the larger companies with eleven or more employees, and where the business is valued at over £250,000, but also with owners aged under 40 that tend to have their businesses protected.
Those are probably the companies who could survive by management taking over, but those least likely to survive haven’t taken the steps to protect their business asset.
Many businesses are limited companies, and their personal assets are protected because of that, however, many have also set up personal guarantees which renders their limited liability status as useless.
The banks will have no block to looking straight to your personal property and assets of the business and individual if they cannot pay their way.
The surviving family, of course, no longer has the income, the business is going down the drain and now a bank is calling at the door.
Even the larger companies who have a few directors fail to see that in the event of death of a fellow director, their new business partner is the beneficiary of their estate.
That could be anyone, and if the beneficiary feels they have a part to play in that business, or they want to sell their share (at their exaggerated prices), I wish the directors all the very best of luck with those board meetings.
The final matter is that of a business will, or the mentioning of the business in a personal will. Over half of business owners had left no instructions of what to do with their shares in the event of a death.
That is a catastrophe. While the arguments of ownership and intestacy rules pan out, banks will move in to take their money back and customers in need of products or services will move elsewhere otherwise their businesses will go under.
I’ll cover next week the simple ways to protect your business.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For advice call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit www.wwfp.net.
