As the director or owner of a business, there are concerns faced every day, week, month and year that are typical to many businesses. These include; managing employees, dealing with suppliers, cash flow management, increasing profits, client retention and servicing, winning business etc… the list goes on.
It is understood that most of these concerns can cause significant issues if they are not addressed. As they are standard business areas, they are on the radar for most companies so they are being addressed regularly, planned for, and hopefully mitigated.
However, planning for a problem that is not yet seen or understood is much harder. As boxers say, “It is the punch you don’t see coming that hurts you the most.”
Below is a fairly standard business scenario and the three problems in the blind spot that can cause a significant financial problem.
Today a business is operating in such a way that the directors and owners are relatively happy, they are sure the turnover is going to be within a few percent of ‘x’ and that as a result profits should be close to ‘y’. All this means that the business plan is working and the company is going in the right direction. At this point a company could be looking to grow, diversify, cement market share or simply breathe easy after a tough couple of years.
Now fast forward two weeks. One of the key people in that business has cancer (1 in 2 of us will*) and they are going to be away from the company for 12 months to have treatment, to rest and to recover. Others in the company will want them to take the time needed to recover but now the picture and situation in the company has changed and the owners and directors are faced with three potentially serious problems.
Problem 1 – Significant drop in turnover
It’s the nature of being a key person to the business they often hold a key function such as sales, client management, innovation, product design etc. People in those functions are working on new ideas, offering an existing service, or hold strong personal relationships with clients, some or all of which stays with that person who is no longer able to work.
Solution 1 – Key Person Turnover Cover
A business protection insurance policy is taken out to cover the potential turnover that could be lost by losing that key person/s. The policy is designed to pay out on death or critical illness.
Problem 2 – Paying for the same job twice
When a key person is unable to work, there is the obligation to pay them some, most or all of their salary while they are off. Add this to the cost of their replacement and potential recruitment fees and a company could be looking at paying out two salaries plus recruitment costs of 15-20%.
Solution 2 – Key Person Replacement Cover
By working out the two potential salaries (plus recruitment costs if applicable) a policy is put in place to cover these overheads in the event of losing a key person to death or critical illness.
Problem 3 – Borrowed money needs repaying and personal guarantees
Directors loans usually require prompt payment should they pass away, causing an added headache to a business at a difficult time. Add to this that many commercial loans and overdrafts have a recall or reduction facility built in should key members of a business be lost due to illness or death. Any loans or overdrafts that have a directors personal guarantee now puts the families in financial danger.
Solution 3 – Key Person Loan Cover
By looking at the financial products used by the company, any loan agreements, and any directors loan agreements, it is possible to calculate what cover is needed and structure these to reduce in line with repayment of loans/debts.
A report surveyed business owners and directors and asked how they could cope with the loss of a key person. The results found 55% of businesses would be unable to continue trading without significant financial assistance and 77% of businesses said profitability would be seriously impacted along with the long-term survival of the company.**
If you were asked that question on how you or your business would cope with the sudden loss of a key person (temporary or permanent), what would your thoughts be?
To find out more about Key Person cover please take a look at Business Protection Overview
If you would like to discuss your companies situation, look at the risk above and workout if you require any Key Person cover, please feel free to contact our Director and head of Business Protection Ben Mason.
0117 979 0118 – 07702 577 452
**Scottish Widows Business Protection Report Sept-2013
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