Business as usual - a sentiment that hasn’t been uttered much this year. It has been a turbulent time for businesses big and small. Whilst the UK Government has delivered an unprecedented level of support, even the most prudent businesses have felt the impact of Covid-19. 2020 has really thrown into sharp focus the need for a well thought out strategy and highlighted the risks faced by us all every single day.
The protection gap was a major concern for a recent client of ours. He had recently lost his father from ill health. His father was not only one of his closest confidants but also his business partner. This led him to contact us regarding his protection requirements as part of his planning and risk mitigation strategy. Shockingly he is now one of only 4% of businesses out there who has the correct cover in place.
We sat with him and a large piece of paper to sketch out where he was, where he wanted to get to and how to achieve this. 2 hours and many cups of coffee later, we understood his business, where it had grown from, where it was going and where his pain points were. The key highlights were:
• Including him there are 3 key-people in the business. The absence of any one of these people would lead to significant issues for the business.
• There was another shareholder with 25% shares in the business. Our client had the remaining 75%.
• There was a workforce of 23 including the 3 key people who he wanted to protect.
• There was some legacy unsecured debt with a personal guarantee in place.
• There was a CBILS loan taken in the last 6 months.
• There was no succession plan in place or contingency for who would cover which roles should a key member of staff be off for a significant period.
• Keyperson insurance – we needed to protect each against death and critical illness:
Our client the MD responsible for bringing in new business – insured for 20 years (to retirement) for the equivalent of 5 years gross profit.
The other shareholder who oversees operations and held most of the process in her head – insured for 20 years (to retirement) for the equivalent of 5 years gross profit.
Head of sales – insured for 5 years (as may not be in the business for longer) for the equivalent of 5 years gross profit.
Both shareholders are married. On their deaths the shares would pass to their spouses. Neither spouse has any knowledge of the business operations so it was important that the company have the funds to buy back the shares, the surviving spouse have the ability to request funds for the shares and an agreement be put in place to enforce such a sale should one party wish to elect to do so. An insurance policy was put in place as was a cross-option agreement – the option enabling either side to enforce a binding sale on the shares.
The business had a lot of good will with the staff. It operated like a big family. Accordingly, our client wanted to make sure that the staff were given a benefit should they fall ill or die in service. A group-scheme was written that covered 4x salary in case of death in service or earlier diagnosis of a critical illness. We also put in place a private medical insurance cover for the team as well. The benefit to this wasn’t only monetary. Added benefits provided by the insurers second medical opinions, counselling and other benefits, which enable staff to return to work as soon as possible.
• The business had finance in place on several machines that would be recalled on death of the main director. It was therefore important that a policy was implemented that would pay out the sum required to clear the debt in its entirety. This policy also covered the CBILS debt they had taken out.
• Furthermore, there was a personal guarantee on their machines, signed by both shareholders and personal guarantee insurance was put in place to cover this. This prevented most of the liability being claimed by the lender if the debt was not covered by the business assets.
• The management team were advised to work with a business coach to implement a continuation strategy and succession plan.
The team were happy to minimise other risks to the business but insure against those that were not avoidable.