The importance of protecting your business can often be overlooked. Some business owners simply focus on increasing profits. However, this narrow-minded approach can often result in difficulties along the way. There may be instances where key employees, whose skills are vital to the business, become ill and require leave. Or a shareholder may pass away suddenly, leaving the company in turmoil. This can have a damaging impact on profitability and in some instances lead to an undesirable change in ownership.
To help compensate for the above, Business Protection is available to:
- Partnerships (including Limited Liability Partnerships)
- Sole traders
- Key employees
To help ensure that your business has long term financial health, having a robust plan or ‘Business Will’ in place is crucial.
Main Types Of Business Protection
Key Person Protection
Whether your business is a Partnership, Company or a Sole Trader, there will be key people whose skills and experience are crucial to your continued financial success.
There are many business that have taken out insurance to cover their employees and crucial business assets such as vehicles and buildings. Although, for those that do not have any insurance cover, their downfall could be sparked by the death or illness of a Key Person.
By taking out a strong protection policy on the lives of the Key People within your business, you will be able to continue trading in the event of losing a Key Person and ensure cash is available to allow trading to continue. The amount of cover needed will be unique to your business. It can typically include the recruitment costs of replacing an individual alongside covering the loss of profits.
Many businesses take out substantial loans to start up a company or to expand their operation and their ability to repay the debt often rests on a few key people.
If a business owner suffers a critical illness or dies, lenders may have the right to demand repayment of any outstanding loans. These loans could be difficult for the business to pay back at short notice if there is limited cash in the company bank account. Even if the lender does not demand the repayment at that time, this could prove difficult when it comes to renewing the terms of the debt. Business loan protection insurance will provide the funds to repay the following:
- Commercial mortgages
- Director’s loans
In the event of a claim, the sum assured is either paid to the business or directly to the lender if the policy has been assigned.
Many of us have a Will to guarantee that if the worst happens there is a clear record of our wishes, regarding our financial and other material assets. However, many forget that it is equally important to have clear instructions of any wishes you may have whilst running a business. There are likely to be concerns raised by both business partners and family members.
Your business partners may ask:
- Who will inherit the business share?
- Will they want to work in the business, whether I like it or not?
- How can ensure that I would have sufficient cash to buy the shareholding?
- What price will I need to pay?
Your family may ask
- Do I want to inherit a share in the business?
- Will I be forced to work in the business, like it or not?
- Who can I sell the business share to?
What price will they be willing to pay me for my share and will that be sufficient to give me financial security for the rest of my life?
In most cases, any business with remaining partners or shareholders will usually want to retain control of the business. Family members, as beneficiaries, will usually want to receive the full cash value in exchange for their inherited share of the business.
It is important to make sure you have a ‘Business Will’ in place, to ensure the best possible outcome for your business and beneficiaries. This is a legally binding agreement which outlines what will happen to your share of the business in the event of serious illness or death. This consists of three main elements:
- An agreement on how the transfer of the business share will take place
- A scheme to provide the money to allow the shares to be bought
- A way in which the transfer can be arranged in a tax-efficient manner
By setting up an agreement in advance the owners of a business can be sure that:
- The surviving shareholders/partners retain control of the business
- The family receive a payment of ‘fair value’ for their share in a tax-efficient manner
- The family are not forced to join the business or the business to accept them as owners
It is important to work alongside your accountant or solicitor to create a ‘Business Will’ to ensure it meets your specific needs.
Executive Income Protection
Executive Income Protection provides essential cash to help cover any costs in the unfortunate event of an employee being incapacitated and unable to work. Cover can include:
- The employee’s earnings
- P11D benefits
- Employer pension contributions
- National Insurance (NI) contributions
In the event of a claim due to incapacity, resulting from injury or illness, an Executive Income Protection plan would pay the selected monthly benefit to the business which can be used to pay the employee’s sick pay. This makes sure that the employee has peace of mind knowing that they are able to meet their regular outgoings rather than having to rely on savings, other family members or state benefits.
Relevant Life Plan
A Relevant Life Policy is a tax-efficient alternative to a ‘death in service’ benefit that allows you to pay your key employees’ family a cash lump sum if they die whilst being employed by your company.
They are most commonly used in limited companies for employees or directors. There are however some exclusions, for example, sole traders or equity partners where they are taxed under Schedule D.
They can also be a suitable alternative to a ‘Death in Service Scheme’ for smaller businesses that do not have enough members to be eligible a group scheme but still want to offer excellent employer benefits, high earners who do not want their group death in service benefits included in their lifetime allowance or employers looking to top up their benefits that they receive from their employer’s scheme.
The policy is taken out and paid for by the company and to be tax-efficient for both employer and employee, the policy must be placed in trust.
Implementing Business Protection
How these arrangements are set up will depend on the structure of your business and particular requirements. At Menzies Wealth Management, we are able to conduct a thorough risk assessment of your business. This includes identifying key people in your business and how their absence may affect profitability, details of any outstanding loans, plus understanding the structure of your business. We would provide you with an indicative cost to put your plan in place to ensure it fits within your budget before providing you with a more bespoke report. We would also ensure your cover remains adequate as your business grows.
For help in planning and implementing your ‘Business Will’ or any other aspect of Business Protection please contact Erica Goodyer, Chartered Financial Planner at Menzies Wealth Management, on +44 20 7465 1942. [email protected]
The information provided is for general information only and is not intended to address the particular requirements of an individual or business. It does not constitute any form of advice or recommendation by Menzies Wealth Management Ltd and should not be relied upon by individuals in either making or refraining from making any financial decisions. Where necessary, you should seek appropriate professional advice before acting on any of the information provided.
Menzies Wealth Management is authorised and regulated by the Financial Conduct Authority (486548). Registered address: 1st Floor, Midas House, 62 Goldsworth Road, Woking, GU21 6LQ Registered in England and Wales 06597008.
Menzies is a top 20 leading firm of accountants, finance and business advisors that operate out of a network of offices across Surrey, Hampshire and London, providing our clients with easy access and local knowledge. Described as the ‘best performing firm outside of the top 10’ by Accountancy Magazine, Menzies has over 400 employees and an annual turnover of more than £40m.