Our relationship with a new client often begins with arranging their mortgage, as this is when most people seek guidance from a financial adviser.
Many of these clients are business owners. It is an unfortunate truth that protection arrangements between the Shareholding owners and directors of a business are minimal, if not completely non-existent.
There are, at the very least 4 main areas that business owners should be concerned about.
1. Key Man Insurance
– The clue is in the title
If the owners or a key employee were to die, what would be the impact on the business cash flow?
Whether, Sales, Marketing, Strategy or any other key area, the loss of an individual will often have a detrimental effect on the profitability of the business. Key man insurance pays a lump sum into the business to compensate for any decline in profitability and to help recruit and train a replacement.
2. Shareholder Protection
The death of a shareholding owner of a business, without appropriate agreements and insurance in place, will normally lead to the deceased’s next of kin/partner inheriting the shares.
A possible consequence of this event is that the remaining shareholders, not only have to deal with the emotional loss, they also have to deal with a new and unknown business partner who has no knowledge of how the business operates.
A correctly constructed shareholder agreement will ensure that:-
- the beneficiary of the shares is obliged to sell the shares back to the remaining shareholders at a price determined by pre agreed formulas/professionals.
This is achieved by ensuring that an insurance policy, written in Trust, on the deceased’s life compensates the beneficiary for giving up their inherited shares.
Using trusts can also separate the shares and profits from the company and the beneficiaries’ estate. This would be good tax planning!