I want to ensure that losing a key person won’t put my business into crisis

Many successful businesses rely on one asset – which can be easily overlooked – yet without it the business would struggle. That asset is those key people that are essential to the success of the business – including you and your business partners. Yet too few businesses have the right insurance to help them survive the loss of a key person.

Considerations

• Identify your key people – these could include a director whose guarantees provide loan funding to the business; an administration manager who keeps the business running smoothly; or people who have relationships with clients or develop new business
• Also identify key suppliers – often small to medium businesses rely on key people outside their business
• Quantify the cost of replacing your key people – including the impact on revenue that a key person would be likely to generate for the business until you can replace them
• If the key person holds equity in the business, identify who might take control of their interest – could you buy out their share? Or would it pass to a spouse or dependent who is not involved in the business?
• Decide how you will value the business
• Determine how potential buyers will pay for the share of the business when the time comes

How we can help

We can help you understand the types of insurance that you may need to protect your business. We can recommend how to best structure your cover, keeping in mind tax and legal considerations. We can help you determine the right level of cover including identifying any potential changes to this value over time.

Two types of insurance to consider are:

Key person insurance – providing your business with death, total and permanent disablement (TPD) and trauma protection to protect your business on the loss of a key person. The principle here is that any insurance proceeds go back into the business to help it survive the loss of a key person – they are not paid directly to the business owners.

Buy/sell insurance – providing the capital required to buy out the share of a business shareholder who dies or is disabled and can no longer work in the business. This cover helps you avoid the challenge of a key person’s shareholding passing to a spouse or dependent who is not involved in the business – and who you may not otherwise choose to partner in business with.

Remember, if a buy/sell agreement was not entered into then control of the deceased person's interest in the business will pass to that person's beneficiaries. This could cause problems with the surviving controllers/partners of the business. They may not want to run the business with their partner's spouse.