Business protection is all about preparing for the worst, so your business has the best chance of reaching its full potential. It can help you to keep trading and financially afloat should things go wrong, which, in light of the COVID-19 national lockdown, things broadly have. In April 2020, most businesses remain closed under Government guidelines, with airlines grounded and sectors such as hospitality and retail suffering heavy financial losses.
Of course, no business owner could have predicted the effect COVID-19 would have on the economy. Yet for some businesses that are continuing to keep going during the crisis and for those that will resume post lockdown, there are still things that can be done to enhance your business financial protection.
Here is our short guide for business owners.
Protection & business type
Financial protection can come in many forms depending on your business goals, strategy, size and stage in its life cycle. In February 2020, there were nearly 5.9m private businesses across the UK; the vast majority (99%) comprising small or medium-sized businesses (SMEs) with under 250 employees. When added together, these businesses form a huge part of the UK economy, employing 16.6 million people.
There are many factors which keep businesses afloat, such as product development and strong distribution networks. However, a crucial (and often neglected) factor is business protection infrastructure. In other words, what would happen to your business if either you, or another key person, could no longer work because they became seriously ill, or even died?
This has always been an important question for a business, but in light of COVID-19, it has become even more poignant. None of us knows what’s around the corner, even if we do not believe the worst could happen to us or someone we know. Unfortunately, we are able to recount cases from our own experience, where a company took out protective cover, and only a few years later a Key Person within the organisation (e.g. the Director) sadly passed away.
Unfortunately, financial protection cannot prevent tragedy but it can help soften the blow. We can help you identify the weak points in your protection plan and find the best solution for your situation.
Whilst all businesses are different, one common issue centres around succession planning; i.e. who will take over should the Director/owner die, or suddenly become incapacitated (e.g. through a serious accident). At FAS, we can work with your Accountant and Solicitor to help you craft both a short term and long term succession plan. The first plan is most important, as it assists in addressing the more pressing issues that could occur if the business leadership is severely disrupted. The second, however, involves developing a tax-efficient plan to eventually transfer leadership to new management, usually after the current Director/owner reaches their intended retirement date. This might take the form of handing the reins to a trained family member, appointing an external successor or even business disposal. Regardless of the situation, careful planning is needed to ensure livelihoods are protected and liabilities are addressed.
Key Person protection
In the case of a sole trader, one of the key protective measures you might want to consider is Life Insurance. After all, since your business largely rests on your own shoulders, if you die suddenly then it will be considered as part of your Estate for Inheritance Tax (IHT) purposes. A lump sum from a good Life Insurance policy can help ensure your beneficiaries have the liquidity they need to wind up your business or take up the reins whilst dealing with any debts in your name.
For joint partnerships and Limited Liability companies, however, things work differently due to the share structures involved. Suppose one business partner in a joint partnership dies; what happens to their shares? Typically, these will pass to their beneficiaries, usually a surviving spouse. Unless you (the surviving business partner) have the funds and written agreement in place to ensure you can buy these shares, your business will run the risk of being held back by a stakeholder who has no interest or experience in stepping in to take the deceased’s place.
Once again, this is where our experience in dealing with such matters can really help. We can help you come to a binding agreement with your business partner which addresses the above scenario, and releases the funds you need to buy the deceased’s share(s) or we can assist with the arranging of a Key Person protection policy to guard against the loss of a key person. The right type of cover can help release the funds you need to help meet commitments, without rocking the entire ship.
If you are interested in discussing any of these aspects in more detail, please do give us a call.