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Mention the word ‘insurance’ and most people switch off, but a recent study by Legal & General produced some really surprising – in fact shocking – results when they asked a number of SME businesses about the insurances they have in place to protect their business and their livelihood.  This prompted us to put a short newsletter together to remind business owners about the options available for business protection and the importance of reviewing your existing arrangements to ensure they are still relevant and appropriate for your circumstances. We hope you enjoy the articles.

In this issue:

• Protecting your business – L&G discover some surprising facts
• 3 questions that all business owners should consider
• Could you retain control over your business if one of your shareholders died?

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Protecting your business – L&G discover some surprising facts

During 2015 Legal & General spoke to a number of SME businesses regarding the importance of business protection and their report revealed some quite shocking insights. The number of businesses with some form of business protection in place was surprisingly low and it highlighted the fact that some were more likely to have pet insurance in place rather than sufficient insurance to protect their business.

The average business borrowing was £344,000 financed in various ways including directors loans, business loans, personal loans and credit cards, yet according to L&G a large proportion of the businesses had no form of cover in place to repay this debt. It is important to remember that a directors loan account must be repaid on death and of the 84% of businesses with directors loan accounts only 28% were actually aware of this. No doubt many businesses would struggle to raise sufficient funds if a loan was suddenly called in.

Another key issue is what would happen to the shares if a shareholder died and would the remaining shareholders be able to retain control of the business. Over half of the businesses in the report admitted they had left no instructions in a Will or made any special arrangements regarding their shares in the event of a shareholder’s death and many had not even considered it. We cover this point in more detail in our article below, Could you retain control over your business if one of your shareholders died?.

Similarly, more than half of the businesses contacted by L&G had not considered whether their business would survive the loss of a key person or felt they had enough staff in place to cover this eventuality. Yet the report indicated that as many as 40% of businesses could cease trading as a result of losing a key person and their 2015 claims statistics show that the average age of claimants under critical illness cover was 47.

The L&G research uncovered some interesting attitudes from the SME business owners they interviewed and highlights the potential issues caused by inadequate insurance provision – after all, these are real issues experienced by real businesses. If any of this strikes a chord and you would like to discuss your own business protection arrangements please contact your usual JJFS contact or email us at justask@jjfsltd.com.

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3 questions that all businesses should consider

Most business owners are focused on the day to day running of the business and its profitability yet many lack vital cover for certain unforeseen events and could be missing unidentified risk to their business. Business Protection could help financially secure the business in the event of a death or critical illness of a key person or owner which is why it’s well worth considering and is far less complex than many people think. So a good starting point is to consider the following three questions:

• Would the business survive the loss of a key person or would it cease trading?
• What would happen to the shares if a shareholder died?
• Could the business repay its debt if an owner died?

There are various forms of business protection available to provide financial cover against these scenarios and we have set these out in our short guide to Business Protection. Please click here to view or download our Business Protection guide.

If you have any concerns or queries regarding shareholder protection please contact your usual JJFS contact or email us at justask@jjfsltd.com.

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Could you retain control over your business if one of your shareholders died?

Oliver Hughes

Have you and your other shareholders put arrangements in place to retain control after the death of any shareholder?  We discuss the role of a Cross Option Agreement in this guest article by Oliver Hughes, Director and Solicitor of Hughes Legal.

A cross option agreement is an agreement entered into between all the shareholders of a private limited company. Each shareholder grants to the other shareholders options over his shares, which are exercisable on death, and takes out life insurance policies, which are written in trust for the other option holders. The option holders then have both the right to purchase the deceased shareholder’s shares and the funds to do so.

A company’s articles of association and any other agreements between all or any of the shareholders should always be considered. For example, they may contain provisions that conflict with the cross option agreement. The position concerning the shares of a shareholder who becomes bankrupt should be checked to ensure it is covered.

The cross option agreement itself should also be considered. For example, if the life policies are fixed term then consideration could be given to how to seek to overcome the potential problem of a party who becomes uninsurable or only insurable at huge cost.

Professional advice about whether a cross option agreement is the best option, the possible tax consequences and the legal issues is recommended and we would be happy to help you.

If you have any concerns or queries regarding shareholder protection please contact your usual JJFS contact or email us at justask@jjfsltd.com.