Life after death for SMEs

Although football clubs buy and sell players for profit, generally speaking a company’s employees and directors do not have a financial value attributed to them in the books. These personnel could actually be perceived as a liability, since their pay and benefits are red ink in the accounts. Without them, though, there would be no black ink against which to set the red.

A major quoted company would be better placed than a typical SME (small/medium-sized enterprise) to withstand the absence or loss of a key executive. Lloyds Banking Group carried on while chief executive Antonio Horta-Osorio was away sick for three months. The hierarchical structure of a major company enabled the absent CEO’s essential responsibilities to be covered.

Limiting the damage
Things can be very different for smaller companies, where the unexpected absence of one individual may hugely affect corporate performance. In many cases, when temporary or permanent loss of a vital director or employee occurs, the impact on production, customer service and other areas can damage corporate reputation and hit the bottom line. This makes key person insurance to cover lost profits an essential precaution.

Finding and paying an experienced replacement at short notice can stretch some companies. The absentee’s working role may, however, be just one of the issues, particularly if the accident or illness was fatal and the victim a shareholder. What happens to their shareholding may be crucial for the company’s future direction. A large equity stake could pass to relatives with no business expertise and no wish to help run the company.

Fair deal for the estate
So, key person insurance can assist operationally after a setback but further cover is needed to enable the surviving proprietors to maintain strategic direction. Directors’ protection cover can provide the financial means by which the deceased’s shares may be bought from their executors. There are essentially two ways to structure the cover.

The directors may insure themselves under a policy held in trust, with the surviving directors as beneficiaries. The policy proceeds would by agreement pay for the deceased’s shares. The alternative is for the company (if permitted to buy its own shares) to take out the policy and use the proceeds to buy back the shares from the estate. Talk to your adviser about the terms and tax aspects of key person and directors’ protection insurance