Business Financial Protection
This should be considered to be an essential foundation to any successful corporate planning, particularly for Pharmacy businesses.
Partnership / Shareholder Protection
At the outset, with the assistance of your Company’s accountant and solicitor, it should be decided upon how the value of the shares in 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 considered 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 (IHT) 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 or desirable, 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 continuing 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.
Key Person Protection
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 makes 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.
There are reasons why a business grows and becomes successful. One of them is the contribution of employees. Do you consider one of your employees key to your success?
Loan / Debt Protection
In many situations where a company requires finance, be it an ongoing overdraft or specific commercial facility, invariably the lender of the funds will require some form of loan protection, either life cover only or life / critical illness cover.
Whether such cover is compulsory or not, it is sensible to ensure that the company can continue to service this debt in the event of the death of key individuals or shareholders.
Reviews
Where such cover exists, it is advisable to regularly review this. Initially, a basic review should be undertaken with regard to the level of cover and the structure required. It is shocking to see how many clients that become underinsured due to the time elapsed since it was considered or simply the success and consequently the growth of the business.
Given the fluidity of the protection market, provision should be reviewed periodically. This can be based upon cost, particularly where cover has been effected with a bank assurer, which may be less competitive in their terms, where the cover has been affected some considerable time ago, where the insured has become a non-smoker or where ratings have been applied. In regards to critical illness cover, the above reasons for reviewing a plan may apply. In addition, you may wish to review the quality and range of illnesses covered where critical illness cover, particularly in light of the new breed of critical illness plans available on the market.
Please don't hesitate to contact Warr & Co Independent Financial Advisers to discuss your business protection planning needs.
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