Business Protection, it should be part of every Business Plan

What does Business protection entail?

Business protection means putting protective provisions in place to protect a company and its various stakeholders from financial shocks as a result of something happening to the human assets of the business. This article seeks to explain conceptually what Business Protection is, the importance of having it in place and the serious issues which can arise if it is not in place. This article will focus on Co-Director Insurance/Shareholder Protection and Partnership Protection. The contract that can be put in place in these scenarios will be the same, the different categories is just to illustrate that this provision is applicable to businesses with different ownership structures.

The Importance of Appropriate Business Protection for all parties

Your business may be a partnership or a limited company with 2 or more shareholders/ directors. A business plan will have been devised for the business to succeed. The business will have certain assets, which are vital to allow it to function and hopefully thrive. As a business owner you protect/insure the physical assets such as your property, vehicles, equipment etc. However are the human assets of the business protected? What would be the financial impact on your business if you or one of your co-directors died prematurely? Is there appropriate provisions in place if this unfortunate scenario was to occur? Business protection provides dual protection. It does not involve just protecting the business. It protects the deceased co-director’s family and the surviving co-director/s, and by virtue the business. Business Protection protects all the stakeholders.

A scenario to illustrate, there are 2 co-directors/partners/shareholders who own the business equally, A & B. If director A were to pass away, his/her share in the business would pass to his/her spouse. This raises a number of questions and issues. Does the spouse want to enter into the business? Are they in a position to assume this role, especially having just suffered such a loss? Would the spouse prefer to be compensated for the share in the business and not have to enter the business? This latter scenario sounds much more feasible, as the surviving director would most likely prefer to take control of the business and not have his co-directors spouse enter the business. This scenario would in the majority of cases suit both parties. However would the remaining co-directors/shareholders have the necessary funds to compensate the spouse of the deceased co-director and buy back his/her share? Most likely not. A formalised plan is needed in place to prepare for this scenario and ensure that the wishes of each party can be fulfilled in an equitable and seamless manner.

The technicalities of the plan to ensure clarity

The easiest way to explain how a Co-Director/Shareholder/Partnership Protection plan would operate is through a case study approach.

In the scenario mentioned above :

• There are 2 Co-Directors, A & B. They’re both married with a family. They own the business equally. The value of each of their share is 200,000.
• Co-Director/Shareholder Protection/Partnership is put in place in the following way. A life assurance policy on each shareholder worth 200,000 is put in place. The company pays the premiums and is the beneficiary of the policy.
• In the case of the death of shareholder/Co-Director A for example. A’s share passes to his/her spouse. The life assurance policy pays out to the company. This policy is to be used to buy B to buy back A’s share from his/her spouse.
• A Buy Sell Agreement is signed when the policy is set up. This means the surviving shareholders are legally obliged to buy the share off the spouse and the spouse is legally obliged to sell. This Agreement is the glue which holds together the business protection arrangement.
• This means that the spouse has been compensated for their deceased spouse’s share in the business and the surviving shareholders have retained control of the business. The protective provision has meant the parties are prepared for the risk if it occurs.
• The life policy taken out by the company on the shareholder provides the necessary capital and the Buy Sell Agreement the necessary formal arrangement to allow this process to occur at a deeply emotional and turbulent time. Both the business and family of the deceased shareholder are protected.
• It is vital that when this policy is set up it is regularly reviewed to ensure that the policy in place on each co-director/partner the sum assured reflects the value of their share in the business.
• A properly formulated Business Protection plan provides both Family and Business Protection and peace of mind that a plan is in place. As outlined above major issues can arise if a co-director/shareholder passes away and there is no Business Protection in place.

To Conclude

Business Protection means protecting your business, your legacy and your family. If you’re a business owner, co-director/shareholder business protection is an integral of protecting your family in the event of your death. In the above scenario, proper protective provisions have meant that each party is adequately protected financially. The Buy Sell Agreement solidifies and brings legal certainty to ensure the plan is executed seamlessly during a turbulent and distressing time for the family of the deceased shareholder. When you have built a business to provide for your family, it is vital to put appropriate business protection in place to protect your family. Also as business partners provisions should be in place to protect each other and to protect the business.

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