Richard Kateley is a one-club man, having worked his way up from a clerk to head of specialist protection over a 30 year career at FTSE 100 insurer, Legal & General. Richard gives an insight into the queries and concerns SME owners have expressed around business protection and provides the key lessons he has learned from those conversations.
SME owners do need to consider protecting their business
In my experience, a substantial amount of business owners are unaware of the everyday risks they are faced with when it comes to the effects caused by the death or serious illness of a key person or business owner. We don’t like to think of our own mortality or that of our colleagues but it should be a risk you should consider. You will no doubt have a disaster recovery plan in case your office burns down, floods or gets broken into, and you have probably insured against these things, but what about your human capital? Let’s face it you can rebuild a building and replace equipment, it is not so easy to replace a key person or a business owner.
One way owners can help the survival of a business is to consider a Business Protection policy. These policies can provide cover for many different eventualities, including the loss of a key person, business owner or the inability to repay debts.
Business protection is not as expensive as you may think
The average business protection policy at Legal & General amounts to £1,200 per year, for instance. But the cost of not having this protection could be the future of your business and that of your employees, and can ultimately save owners a lot more than this in the long run, making it a worthwhile consideration.
Policies for business protection are not as complicated as many believe
The policies are relatively straightforward, with principles similar to any other type of life protection you may have to protect your family. There are three key areas involved in business protection, including:
- Profit: When faced with the loss of a key person, the policy injects cash into the business to replace any profit loss and recruit a replacement;
- Debt: If a business loses a key person, the policy will cover any outstanding loans and other debts;
- Ownership: At the loss of a partner or shareholder, the policy allows remaining business owners to buy the residual share of the business.
Business owners are recommended to seek help from advisers should they need the policies explained in more detail.
Losing a key person can seriously affect your business
Thankfully every business is different, but each one has members of staff who have a direct impact on the cash flow, profits, creditors and brand. A key person could be anyone integral to the business, from the owner to a skilled employee, although they are all characteristically difficult to replace.
Research from Legal & General has shown that as much as 40% of businesses would cease trading in under one year if a key person died or became critically ill, yet only half of businesses have Key Person cover to protect them when this happens. Additionally, 60% of SMEs said it would take them up to a year to replace a key person.
Your business borrowing needs to be protected
Business loan cover can protect organisations when faced with the inability to repay loans, helping to pay back any outstanding loans and safeguarding the business owner’s personal wealth. Our research showed that a third of businesses have no insurance in place to repay the borrowing should a Key Person become critically ill or die, implying that they would all face financial difficulties at the loss of a Key Person.
It’s not as easy as you think to buy a business partner’s shares in the event of their death
The loss of a shareholder can have detrimental effects on a business, which could eventually lead to financial instability should other owners be unable to buy their share. Legal & General’s research revealed that, in this situation, many UK businesses would be in danger – in fact, over half of the businesses which took part in the research had left no instructions or special arrangements regarding shares in their wills. Similarly, over one third had no life cover to protect the shares in the event of a death.
In addition most business owners would want their families to get fair value for their shares in the business that they have helped build. Protecting the lives of all the shareholders or partners in this way makes this a reality and no longer just a wish.
Don’t be afraid to ask for external advice
It is imperative that business owners do not only take advice from accountants, but financial advisers also, many of whom are knowledgeable about many corporate issues. At present, 82% of companies use an accountant, whereas only 49% use a financial adviser. Your accountant may be able to recommend a local financial adviser if you don’t know one. If not there are many directories on the internet like the Chartered Institute of Insurance.
Don’t be afraid to try new things – talking to the right financial adviser could make a considerable difference to the success of your business, offering expert assistance at all stages of its life cycle.
Did you know that in the UK today there are an estimated 5.4m private sector businesses and 95% have less than 10 employees. If you are one of these, not only are you the backbone of the UK economy and therefore important to the UK, but you are even more important to your employees. Losing just one person could put a terminal pressure on your business, leading to increased workloads and stress for your remaining staff and all this at a time when the business is in shock at the loss of a colleague. The right advice and protection could make sure that your company is prepared should the unthinkable happen.