Key Person Protection

The consequences to a business of its top sales person falling seriously ill, for example, is much higher than most people think and is certainly far greater than a van being written-off.

With his or her departure go their contacts, knowledge and expertise. This can have a direct and immediate impact on the company by affecting income, your reputation for reliability, client relationships and loss of business to competitors.

Recruiting and training someone to replace a key figure can be costly and time consuming. Meanwhile the business could be losing valuable contracts and suffering financial repercussions through a drop in cashflow.

In small-medium sized businesses, in particular, some people really are indispensable.

It’s important, therefore, that all companies consider insuring their key people such as directors, production managers and specialists against injury, illness and even death.

The level of cover may be estimated in relation to the amount of income an employer might be expected to generate over two years, for example. Other indicators can be estimated cost of recruiting and training a replacement, or the size of the key person’s salary and benefits package.

Policies will pay out a lump sum to meet the loss and to help cashflow immediately the key person is unable to work.

The same key person policy assigned differently will also offer shareholder protection in the event that a partner dies, a concept that can be replicated for however many directors there are in the business.

In such cases, the spouse or children of the deceased are likely to inherit their shares.

The owners may not find the involvement of their late partner’s relatives acceptable, or the heirs may prefer to have the value of the shares in cash.

It is normal for business partners to have a shareholder agreement, which at BHP is done by our company team with whom we work closely. This agreement can be drafted to include a clause that will allow for shares to be passed automatically or to be sold to the surviving shareholders.

In instances where the survivors have to buy the shares from the deceased’s family, again money will have to be found.

While none of us like to contemplate things going wrong, it comes as second nature when it’s about our non-human assets.

Some relatively straightforward advance planning will ensure you have the right protection in place if the worst happens.

 

Stewart Thompson is an independent financial adviser with Blackett Hart & Pratt in Darlington. For more information, contact him on (01325) 466794.