News & Views

It has all the hallmarks of a classic taboo subject – business owners know that there is a risk to their business lurking in the background somewhere and evertime they think about it they feel vaguely uncomfortable. But the easiest thing for a business owner to do is to move swiftly on to something else. After all its not exactly a problem today and it might not even happen………

So what’s taboo? Death of course, or rather death and serious illness. To be more specific its the effect that these two events can have on a business, especially small and medium sized businesses.

If you want some proof how about this for a stat – ”39% of business owners expected their businesses to fold within the death or critical illness of a business owner”.
Here’s another one – ”58% of businesses had no formal agreement to establish what would happen in the event of the death or critical illness of a business owner”.

[source – Intsitute of Directors and Legal and General – Business Protection Research]

‘Does it really matter?’ you might ask.

The question can be answered both quantitively and qualitively.

First the numbers – according to mortality data at http://www.actuaries.org.uk/ the following is true. Take a business with three male shareholders all aged 40 – the chances of one of them dying before the age of 65 is 19%. Thats quite scary – its going to happen a lot! The chances of one of the same three suffering a critical illness before the age of 65 is 64%  – and thats very scary, a probability rather than a possibility.

But the qualitive answer is perhaps even more worrying. Because most people tend to ovoid spending time thinking about this issue, they do not consider the potential consequences. These could include but are not limited to the following

1) The bank might seek to call in personal guarantees regardless of the wishes of the business owners (and yes that could mean your home is at risk).
2) The business trying to raise a significant loan to buy out the shares of the deceased party
3) The business owners may have to try to raise the money required from personal assets such as the family home
4 The business taking on considerable new loan costs to repay the loan
5) At the same time the business suffering a fall in income and profits as a result of the loss of the business owner
6) Therefore the bank may not even agree to fund the share buy back, especially if trading conditions are not ideal, or if the bank lending is constrained due to general economic conditions
7) In the absence of commercial funding being available to the company or the remaining shareholders the family holding the estate of the shareholder may be forced to seek an external third party share purchaser

As someone who has faced this situation in business in real life I can assure you that these sort of risks are very real and potentially very damaging. In our particular case it was serious illness rather than death. Our first thoughts were obviously with the shareholder and his family -thank goodness he made a  recovery, though it took some (very worrying) time before he knew that this would be the final outcome. During which time not surprisingly he decided that his priorities had changed and he no longer wanted to be involved with the business. Luckily for us we had the correct life/ critical illness policies and legal agreements in place which meant that at the right time the required funds were in place to finance the share purchase and with no need to take on additional debt. At the same time our eyes were opened to the consequences of how differently things might have turned out had we not been properly insured.

Here’s an odd thing – most businesses think nothing of insuring their business premises for fire. They don’t do so because there is a high risk of the insured event actually occuring, they do it because of the size of  the potential financial consequences for the business that would follow a fire. Literally a fire could destroy an unprotected business.

So given the fact that the death or critical illness of a business partner or shareholder is so much more likely to actually occur it might be said that any of the 58% of businesses with no plan referred to in the research (above) are very playing with fire. Sensible action would be to take expert advice on the matter before its too late.