You’ve worked hard to build your business. You’ve put in endless hours as well as your own blood sweat and tears to make your company successful. As long as you keep your company innovative and competitive, that’s all you need to worry about right? Unfortunately this isn’t always the case. There are many threats to a business other than its competitors that people do not always think about – for example, the death or terminal illness of a key member of the business. In this post we will be discussing what those threats are, and how you can use business protection methods to counteract them.
The death or illness of a key person
If the worst was to happen and a key member of your business could no longer work, what would that mean to your business? It’s a common mistake made by a lot of firms to believe that everything would be the same, that business would be as usual. The reality is often much different. When a key person is lost, the first hit to the business would be the lack of staff. Without that key member, vital business dealings would not be completed. You need to hire someone new. This is not a quick procedure – hiring the correct person could take anywhere between 6 months to a year! You need someone with the right qualifications and experience to take on the responsibilities, and complete these to a sufficient level. Time and money need to be invested into this endeavor, something the business may not have during such a crisis.
If a major player within a team is lost, your confidence in the ability of that team to perform is likely to wane. This is exactly how creditors tend to think after the loss of a key person. Banks may call in any overdrafts, and creditors may seek early reimbursement. The business can end up with a serious cash flow issue should it not have the procedures in place to protect against this. Once again, the business is in need of a cash injection.
With these issues in mind, and many others such as the increased likelihood of staff resignations and the impact on the reputation of the brand, its clear you need a plan of action should such an event take place. This is why key person insurance as a method of business protection is necessary. It offers a one off lump-sum, assessed upon the business’ short term needs, so that any cash flow issues can be smoothed out and loans, overdrafts and hiring costs can be covered – leaving your business with a bit of breathing room.
Recalling of debts
If your creditors recalled all their money today, could your business pay? As we mentioned previously, the loss of a key person may lead creditors and banks to recall any loans the business has. When a company is rocked so heavily by such a tragic event, many struggle to recover and forced administration is not uncommon. Banks want to protect against their losses, and want to make sure they do this before the firm goes under. Creditors may not be at the top of the list in administration proceedings, meaning they may not get their money back unless they regain what they can from a company before its filed. This, paradoxically, can be the cause of a company’s cash flow issues, and its eventual downfall.
Loan repayment insurance can be taken out on a specific debt to ensure that repayments are made should such a crisis occur. When a debt is covered, it leaves room for the business to direct its limited funds to areas needed to help it recover fully from the loss, be this hiring costs, investment into brand reputation, or any other areas.
Death of a shareholder
Should a shareholder pass away, does your business have a plan? Maybe you hadn’t thought about it till now, or maybe you know the firm will have to purchase those shares. But how? Upon the death of a shareholder, a firm’s business’ dealings can be thrown up in the air. In most cases, through the successful creation of a will, shares in the business would pass to the family members of the deceased. Family members often have limited experience in contributing to a business as a stakeholder should, and therefore shares can end up on the open market. This can be a dangerous position for a company to be in because of the risk of exposure to third parties and competitors. Stakeholders do not want a shake up of the business due to such an event, and therefore require protection against such a situation to ensure the safety and stability of the firm. The purchase of the shares by the business is the ideal situation to mediate these risks, but it is not always possible due to lack of funds available.
Stakeholder insurance has two purposes. Firstly, it sets out the agreement between the shareholder and the business (cross-option agreement) over the handling of the shares. Often this means consenting to the sale of the shares to the remaining shareholders on behalf of the family. Secondly, it provides the company with funds required to purchase the shares. A valuation of the shares in often agreed in advance in order to ensure the correct figure is insured upon, and the claim amount is agreed upon.
Plan for all eventualities
Now you should have better understanding of the risks involved for a company should the death of a key person or shareholder arise. Most businesses underestimate and under prepare for such an event. Making sure you’re knowledgeable on such issues is only the first step. I’ve also outlined the opportunities available to mediate the risks to ensure you can protect your business. Financial planning can be the safety net your business needs to help it soar to success in the future, or the lack of could be its death knell – make sure you have the correct plans in place.
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