Business Financial Protection Planning
Whether operating a pharmacy business or undertaking work as a Locum, there are a multitude of different areas of business protection planning that need to be considered, some clearly more pertinent than others dependent upon a client’s individual situation. Whatever your needs or wishes in this area, our professional opinion is that these should be addressed as a priority, as the consequences of delay or failure to address can be serious.
Two important areas in particular which you may wish to consider are key person cover and share protection insurance.
Key Person Cover
Key person insurance is affected where the long-term absence through accident or ill health, or death of an individual, will have a severe detrimental effect on the profits of the business.
This differs from shareholder protection as it is affected to cover the cost of replacing the intellectual or physical skills that contribute to the success of the business and the financial impact the loss of such skills would create. Clearly such cover may still be considered for shareholders as they are often founders of a business and are in essence ‘what make the business tick’.
As the situation arises, key employees should also be protected, to provide the business ‘breathing space’ and the ability to endure the downturn in profits that could ensue. This allows the Company time to seek out the right replacement and to cover recruitment costs, which alone can be quite high.
Key person insurance can be life cover only or a combination of life & ill health benefits, such as critical illness or income protection benefits. The structure would, of course, be determined by the effect in each situation and because of this, such cover is often subject to financial underwriting in addition to the usual medical underwriting process.
Share Protection Insurance
We view this to be a key part of any corporate planning.
At the outset, with the assistance of your Company’s accountant and solicitor, it should be decided on the value of the shares and the business and on what basis the Company would be restructured in the event of the death, ill health or retirement of one of the shareholders.
In regards to the death of one of the shareholders, provision should be effected to provide the company with sufficient funds where the company is to buy back the shares or more commonly to provide the individual directors with the funds to purchase the shares personally.
In the case of the latter, you should effect a cross option agreement (also known as a double option agreement), rather than a buy & sell agreement. This is worth considering, as the former does not constitute a binding contract for sale, and thus Inheritance Tax Business Property Relief is protected. An option to sell the deceased’s shares is granted to the executors and an option to purchase the shares is given to the remaining shareholders. Either side may exercise the option, which is then binding on the other party.
The purchase can be financed either by self-funding out of company assets, or by raising debt. If either of these is not viable, a highly cost effective alternative is to effect life assurance in respect of each shareholder.
Effective planning in this area avoids shares being sold to external parties or a spouse or partner of the deceased being able to participate in the running of a business.
In conclusion, the key benefits of a share protection arrangement are certainty and control. Certainty in knowing that the business can finance a prospective purchase and that the business can survive the death of a shareholder and control in that the surviving shareholders can decide who they continue to run their business with.
Other Possible Considerations
Aside from the above, the company may wish to consider provision which may protect the company and/or provide valuable employee benefits. These may include income protection to provide continuation of salary, death in service, critical illness insurance and private medical insurance.
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