Business Insurance and Protection
You can’t change your fortune, but you can equip your business to cope with the unexpected – Simon Chegwidden, Financial Adviser for Anderson Lloyd LLP explains how.
Imagine you and a friend have got a new boat sat ready for its maiden voyage and your families are coming with you. It makes sense that, regardless of your experience, there would be some basic safety checks you put in place before setting sail: radio, life jackets and life raft, all present and correct? Emergency plan put in place?
At the end of the day, you can read the forecast, you can plan your trip, learn from other people’s experience but you don’t really know what conditions you might face or what emergencies lie ahead. But you do know that with the right planning and with the right equipment you have a good chance of surviving most encounters.
The same can be said for a new business. Most would not start without a business plan charting their route, or without first checking the conditions in the markets… You would be brave to head into unchartered territory knowing there’s a storm brewing. So do most businesses have an emergency plan? Do most make sure they have the right tools and equipment? At the end of the day a business usually has a family in the background, if not directly involved they will be affected if there was an emergency. If you’re going to sea with your family aboard would you make doubly sure you were as safe as you could be? Surprisingly, the answer is often no! Less than 5% of business have sufficient protection in place, so what can be done, what options are there?
Let’s look at a scenario – two directors, Jane Carter and Brian Laval, own and run an unlisted, limited company, Web6Web.com, each are 50% shareholders and both have families. Their business is an internet solutions company offering web design, internet marketing and e-commerce. They employ 5 members of staff including Sam Regal, their web marketing specialist. Sam worked for Google and his expertise and knowledge attracts a lot of customers to Web6Web, both Jane and Brian are designers and rely on Sam for more than 50% of the business’ turnover.
Now let’s look at the emergency situation: the unthinkable – Brian loses his life and his wife inherits 50% of Web6Web.
Brian had a young family and his wife, Sue is now faced with bringing up the family on her own. She has no interest in working for the business and having a 50% interest is more of a burden. She approaches Jane and asks if the company can buy her out – she knows that her shares would be worth £400,000 and she needs the money to look after the family.
Without a protection plan – Jane cannot raise £400,000 through the business. Without Brian she has had to take on an extra and specialised member of staff which is costing £60,000 a year. They have been ploughing money back into the company so it’s not cash rich and the bank is not willing to lend.
What are Sue and Jane’s options?
Sue is then unexpectedly approached by a rival company who offers her £350,000 for her shares in Web6Web. Jane doesn’t want her to sell to them but Sue is left with little choice and sells 50% of Web6Web to their rival.
With a protection plan – Jane and Brian had planned for the unthinkable and had a ‘cross option agreement’ in place, a trust set up and life cover for £400,000 each.
When Brian died £400,000 was paid into the trust. When Sue approached Jane she was able to use the terms in the cross-option agreement to trigger the sale of her shares to Jane and Jane was able to use the £400,000 to purchase the shares from Sue.
Due to business property relief and because of the cross option agreement, Sue received the full value of her shares outside of inheritance tax rules (so if she was not Brian’s wife there would still be no inheritance tax to pay). Jane retained full control of Web6Web. Due to a second key worker cover Web6Web also received £120,000 to pay for the cost of replacing Brian for the first 2 years. Sue is glad she has the same key worker cover in place to protect against the loss of Sam as without him the business would face losing 50% of its revenue.
How much does it cost? The main cost is the life insurance. Assuming Brian was 36, a non smoker and protected until he was 60, his cover would have cost as little as £24 p/month for £400,000 to protect his shares. £120,000 to cover the wages of his replacement just £9 per month. That’s just over £8 p/week to provide the company and related families with over ½ million worth of financial protection. The cost of the advice, free – the chosen life company would normal pay the adviser.
This is just one way your business can protect itself from the unforeseen. If you would like to know more and for a free review then please call Anderson Lloyd on 01872 261800.