BUSINESS protection insurance could prove vital for more than half of small and medium sized enterprises if they lost just one key employee due to death or critical illness.

A survey of 5.7-million SMEs by insurance giant Legal & General highlighted a lack of awareness of the risks faced by businesses that would collapse with the loss of a single person.

The survey revealed 99% of companies had identified at least one key individual who should be protected, 40% have no continuity plan should they lose a key person and 50% have no formal agreement for the transfer of shares on death.

We advise a four-step Succession Contingency Plan that would put businesses in a strong position to guard against all eventualities.

The L&G survey revealed some surprising and quite scary statistics. Businesses really shouldn’t be in a position where the loss of a single person would mean the end of the road.

Business owners, directors and shareholders should make sure they and their business are not in such a precarious position.

4-Step Succession Contingency Plan:

Step One – Shareholder’s Agreement

Ensure your shareholder’s agreement states what should happen if a director/shareholder dies. If other shareholders don’t have the option to buy their shares, then they may end up with the person’s spouse, children or even a charity. They may then have the right to appoint directors and generally interfere with the running of the business.

Step Two – Insure the Risk

If the other shareholders are buying back shares from each other, they can cross-insure each other so there are funds to buy out the shares of a shareholder who passes away.

Step Three – Deal with any capacity issues

Even a short period of incapacity can have serious consequences for a business if a director can’t sign cheques, or comply with voting requirements in shareholders’ agreements. As well as putting in place a lasting power of attorney to enable a family member to manage their general financial affairs, company directors can also appoint someone specifically to deal with business issues.

Step Four – Each director should ensure their own planning is compliant and tax efficient

Each shareholder/director should have their own Will and ensure it complies with any shareholder agreements. Wills can be structured to maximise the tax reliefs available to business owners.

For further information, contact us on 01782 646320.