LAST week’s column talked about the serious issues that could occur when a business doesn’t have its own ‘will’ or protection in place, effectively wiping out the investment which is your business, which would almost certainly have gone to your beneficiaries free of inheritance tax.
Having worked so hard away from the family for all those years, to see the asset crumble due to lack of financial planning, seems unnecessary.
There are some important areas to protect that will allow the asset you have built to move freely to your family.
Protecting in the event of death for loans, protecting key employees, and protecting the shares in your business are great starting points.
I’ll come to these in a moment, but you should also put in place a decision of what you would like to happen with your business asset in your own Will.
The more you share with your team and bank manager the better.
Bank managers have many accounts to look at, and a business which shows where protection is in place, what the desires of the owner(s) are, and where the team is fully prepared and understands their responsibilities, is always likely to tick that manager’s box and take his risk away.
Furthermore, creditors and customers will know the business is organised and in a good financial position and will stick by it, allowing the family to deal with the tragedy they are faced with.
According to the Office of National Statistics, 90 per cent of businesses that fail had cash flow issues, and in 2016, some 60 per cent gave ‘access to capital’ as their primary reason for failure.
On the death of an owner, cash flow would be restricted by either the ability to repay loans, finding and hiring a new replacement for the key staff quickly, and of course, access to capital to pay off an existing shareholder.
Loan protection is very straightforward. Look at the term of the loan and the amount that needs covering, and insure yourself for that amount.
If there are a range of partners and you want to keep costs down, you could insure for a share of the loan, but it’s better to have it repaid in full.
You can have the insurance as a decreasing option to reduce with the loan as it drops which cuts costs significantly, as the amount you are insured by decreases as you become older (and more costly to insure).
The loss of a key person is also significant, yet more than half of businesses did not have it in a recent survey.
The main reasons given for not taking it out were that businesses had not considered it; had not gotten round to it; or that cost was an issue.
If you picture the scenario of the loss of a key person, the cost now is really pretty insignificant. A key person is someone whose leadership, skills, contacts, knowledge or experience, is vital to the business.
There are variations of how you calculate the amount to be insured, and an independent financial adviser can help with that, but often it can be five to 10 times their salary. The firm simply insures the key person, with the benefit paid to the company, allowing cash flow and financial security and time to think, hire, and deal with the dip in productivity.
The final cover is that of business share protection. The company might have a number of directors and each director has shares that have a value.
That value is important to both the company and the deceased director’s immediate family. In the event of death, each director would want their family to be paid off and the company would want to be able to do that.
So, the firm or director insures each director for the value of the shares and couples that with a legal agreement which states that if either party asks to sell or buy the shares, the other is obliged to sell or buy.
As the company has the money from the payout on death, they buy the shares from the beneficiaries who might otherwise not have been able to be paid.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you would like an independent quote for any of the above call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit www.wwfp.net.
