One of the main protection issues involving a business is the effect on the dependants of a deceased owner, or the position of a critically ill owner who might wish to leave the business.
The potential problems that might arise can depend on the business type, the size of the business share, and the procedures laid down in the articles of association or the membership or partnership agreement if there is one.
For example, if one of the owners of a limited company becomes critically ill or dies:
- They or their family might want to sell their share of the business. This could be to a competitor or some other unsuitable buyer. If the owner was a majority shareholder then control of the business has been lost.
- If the outgoing owner had at least 75% of the shares then they could also force the outright sale or winding up of the business.
- Perhaps the owner's family may wish to become involved in the business, which may be at best disruptive or at worst unacceptable to the other owners.
A majority shareholding allows the new owner to appoint themselves as a director and remove other directors, gaining day-to-day control of the business.
- The other owners may have to use funds they intended for other purposes to buy the share of the deceased or ill owner.
The other main protection issue is the effect on the business should a key employee die or suffer a critical illness
These key people can include the owners, senior directors, sales people, production managers, research and development staff or other people with specialist skills or knowledge.
Often a person's value to the business is reflected in their remuneration package. When you are trying to identify the key people this can be a good place to start, although this may not always be the case.
Whatever the key person does, their loss could have disastrous consequences for the business. Some of the problems the business may face are:
- The need to recruit or train a replacement.
- Loss of important personal or business contacts.
- Difficulties in meeting existing loan repayments.
- Loss of confidence from suppliers and customers.
- Difficulties in raising new finance for new developments.
- Loss of detailed knowledge of the businesses processes and systems.
- Having to repay a loan the key person has made to the business.
Having the right protection in place can help to ease all of these problems..
It can't stop the unthinkable from happening, but it can make dealing with the consequences a little easier.