Beyond Property and Liability: The Crucial Need to Insure Business Owners

Gather around for story time!

Accountants, we understand that your clients often turn to you with various queries and ask "Do you know anyone who can...". Today, we have a compelling story from our remarkable financial planner, Michael Gould, that sheds light on a critical yet often overlooked aspect of business protection: insuring the business owners. Through his narrative, Michael vividly illustrates the potential risks and dire consequences of neglecting this vital safeguard. So, sit back, and let's dive into this tale..

“Some years ago, I was asked to advise two directors of a printing company based in Hertfordshire. One director managed the business internally and the factory, and the second headed up sales. They had, some months previously, received an offer from a competitor for a substantial amount which had they agreed to sell, would have enabled them both to retire comfortably. They decided to continue to build the business with a view to a later sale and their accountants asked me to advise them on whether they should consider shareholder assurance to protect the value of the holdings they had in the company prior to any sale.?

Let me explain what shareholder assurance is.

It is usual to find that most owners have much of their wealth tied up in the value of their business. What they do not realise is that they would have significant issues in extricating that value in the event one of them was to die. Let's assume that there were two directors as in this case. If one of them was to die the shares would usually vest in the beneficiaries of their estate which are most likely to be their family.?

What does this mean to the business?

It means that the surviving director is now in business with the family of the deceased director which may not always be the best case. They are unlikely to have the skill sets that the deceased director had which could possibly have significant impact on the growth of the business as they look to protect their own holdings. Furthermore, the surviving director maybe in a situation that they must run the business themselves which could lead to significant difficulties if they don't have the skills to do so.

What happened to my clients

We had a couple of meetings where we discussed this idea and the sales director was extremely keen to proceed. However, the director who ran the operations side of the business was quite reticent and kept delaying making a decision. In conjunction with the accountant we put a meeting in the diary to complete the applications and send them up to insurers. On the day of the meeting, I was driving to see the clients when I received a phone call to say that the operations director had been found dead at his desk that morning. It turned out the reason he had wanted to avoid any application was that he had a significant medical problem which he was concerned would come to light during underwriting.

Unfortunately, no insurance was in place at the time of his death to provide the capital required by his family. The surviving director tried to run the business but quickly realised that he didn't have the ability, nor did he have the money available to bring in new people to take up the role. Subsequently, the competitor that had offered them a purchase some months previously came back with a reduced offer at 50% of the original. The surviving director accepted the offer to avoid the company getting into further danger and the effect of this was that both families suffered financially rather than having in place insurance that would have paid out sufficient funds to enable the family to receive the full value of the shares, without having to sell to a competitor.

This is a true story and I find it incredible when I meet so many company directors who do not realise that they have the ability to insure the value of their shareholdings in their business in the event of death and possibly critical illness.”

If this story made you consider any of your client’s circumstances then please get in touch with our incredible financial advisor- Michael Gould through the Syndesi platform to discuss how they can help your client avoid this type of problem.?

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