Business Protection: Putting the Business First

Growing a business is fast paced and exciting. It takes a lot of work and effort and can be one of the most rewarding and challenging things that someone can do. Which is why it is so odd that the entrepreneurs that work so hard to create a business, can leave themselves so exposed by not considering protecting it and ultimately the incomes of themselves and their staff. Business owners are more likely to have pet insurance than they are to have adequate cover in place to protect the business itself.

53% of businesses have said that they would cease trading in under a year, on the death or critical illness of a key person. It could therefore be argued; a responsible employer should put its business protection at the forefront of their considerations.

But why are there so many businesses without adequate business protection?

Most businesses are simply unaware of the risks that they could face if they were to lose a key person or business owner due to death or a critical illness. It’s something that is mentioned somewhere on page 87 of Business 101 but that everyone skips over. In reality, it should be one of the first things that is put in place once an enterprise establishes itself.

On average, 70% of newer businesses have less than 10 employees and it is those skills, knowledge, experience or leadership, which contributes to the financial success of the business. Yet businesses are more likely to insure their premises, stock and equipment than their key people. Why wouldn’t they, it’s the logical thing to do, except all that is simply ‘just stuff’ unless you can deliver to your customers.

Without those key people what would happen to the business cash flow? Where would the future profits come from? How would this impact the customers, other members of staff and creditors? What would the reputation damage be? More importantly, can you afford to deal with all these problems?

Keeping the businesses credit lines open during periods of turmoil such as the death of a key person can be essential to its continued success. Banks lend to people in the first instance, not organisations. On death it is standard practice for a bank to call in its lending, be that loans or overdraft, if they feel there is a threat to it.

Almost two thirds of businesses have some form of debt, with an average borrowing of £176,000. Not an insignificant amount. Over 25% of businesses are not aware that a Director’s Loan account needs to be repaid on death.  As a result, most business owners will have a personal life cover in place to repay their mortgage and outstanding debts for their families but not for their business nor will they have considered where the money would come from to pay those liabilities.

As a business moves to an established position or towards maturity then the continued ownership of the business needs to be considered.  Over half of businesses have no instructions in a Will or any special arrangements regarding shares. People include their car, their home, Aunt Julie’s necklace in their will, but not their business.

If there is no adequate protection in place, shares of a deceased owner may be passed to their family, meaning that the surviving business owners could lose control of a proportion or all the business. The treatment of company shares can be seen in a company’s ‘Articles of Association’. However, one third of partnerships and limited companies have never reviewed these documents, since the business started.

A business for many people will become the biggest asset that they have. There are simple steps that can be taken that will help to ensure it stays that way. After all, without taking them, how will you pay for pooch to be seen by the vet?

For more information or to discuss any of the above in more detail, please call us on 01772 821 021.

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