How to help clients protect their businesses

Recent Office for National Statistics updates indicated input price inflation for businesses rose more than 19 per cent to its highest point on record, as CPI hit 8 per cent in March 2022.

Maddy Alexander-Grout, chief executive of money-saving app My VIP Rewards, says: "The rising cost of living is dismantling many families and small businesses before our eyes."

Rising inflation, two years of poor business growth thanks to Covid-19, the war in Ukraine and the Brexit effect have hit Britain's entrepreneurs hard.

They may have overlooked protecting the key business asset: the employees.Beynon

Add to this figures that suggest 75 per cent of UK businesses now have some form of debt, up from 51 per cent in 2018 – perhaps as a result of coronavirus loans – and it is clear there is significant pressure on business owners.

Martin McTague, national chair of the Federation of Small Businesses, says: "It’s been decades since we’ve seen input costs surging at this kind of unmanageable rate.

“The discrepancy between the rise in costs for firms and consumer prices shown in these latest updates gives you some sense of how small business owners are taking the hit directly – in a lot of cases, reducing their take-home pay or scaling back investment and expansion rather than passing on higher costs to customers."

Alan Richardson, protection specialist at LifeSearch, concurs: "The past few years have been hard on UK businesses. Previous profits have been eaten up, rainy day funds depleted and many employees have struggled with their health – including those who are key to the business.

"Meanwhile, competitors have been able to entice good staff away with better benefits."

But while small business owners (including advisers themselves) may be feeling vulnerable, there are ways to help protect your small to medium-sized enterprise clients.

Business protection

Many small business owners may balk at the idea of adding to their monthly expenditure by taking on business protection, such as key person cover, but the last thing a small company needs right now is the loss of a senior manager or the business owner themselves.

According to Alun Beynon, protection specialist at Scottish Widows, business cover is "in essence, a survival policy for the business.

"It is protection against the financial impact that death or critical illness of a key person or shareholder could have on a business."

And, in times of economic uncertainty, there is an "increased opportunity" to communicate the need for business protection, according to Beynon. "Many business owners will be used to insuring their premises and equipment and the resulting financial loss this can have. 

"But they may have overlooked protecting the key business asset: the employees."

Payouts as a result of this cover can be used to pay off debts, buy out shareholders, pay for recruitment or locum fees – basically anything that can ensure a business can continue to support its clients.

Options available

What kind of insurance could be put in place so other directors can buy out their share, for example, or cover liabilities in the short term?

1. Key person cover. Key person cover protects a business against loss of profits following the death or serious illness of one of its key people, whether the business owner, senior director, finance director, sales and marketing or anyone with specialist skills and knowledge.

Depending on the policy, it can also provide funds to help the company source a replacement. 

2. Loan protection. Loan protection cover provides a business with the funds to repay commercial lending, or a director's or partner's loan to the business.

Beynon explains: "Some commercial lenders insist that life and/or CIC is put in place, or personal guarantees are signed before releasing the funds, so this product can indirectly protect personal assets." 

3. Shareholder protection. This sort of arrangement provides funds for other shareholders, such as fellow directors, to buy the deceased's shares from the family. Unless there is an expressed wish for the shares and the responsibility to be passed onto the next generation to keep the firm in the family, it is important that the business is able to continue and flourish with strong management.

Otherwise, the surviving shareholders could lose control of the business, and the deceased's family could be left with an unwanted shareholding and no obvious buyer.

According to Beynon: "Similarly, if a shareholder suffers a critical illness and wishes to leave the business, the arrangement aims to provide funds for the other shareholders to buy that person's shares."

4. Executive income protection. This, according to Sage Wealth Management, is a type of protection for limited companies where the business owns and pays into the account. If an employee becomes ill and is no longer able to work, the company may then pay out.

5. Group IP. LifeSearch's Richardson explains: "With GIP it is also possible to continue paying that key person. That does not mean just paying 70 per cent of their salary and continuing with national insurance and pension contributions. It also includes occupational therapy and emotional support to help the individual get back to work sooner.

6. Relevant life cover: For RLC (single life death-in-service) products can also help advisers to offer employer-sponsored cover, which means that as well as protecting the business, employees can also look after their staff.

For Setul Mehta, head of business development and adviser services at The Openwork Partnership, one of the first questions a business owner needs to ask themselves is: What is a key person?

Mehta says: "A key person for me is anyone whose loss would affect the business's ability to maintain turnover or generate profits – or even just continue to run."

Paterson says advisers should help business owners by discussing key person cover, depending on the size of the business. One benefit is that because the policy is owned and paid for by the company, then the protection benefit would be payable to the business as a trading receipt, and provide valuable capital to help meet the loss of the key person and/or any liabilities.

Conclusion

As ever, communication is crucial. Marcus Primhak, business protection manager at LV, says: "Effective business protection recommendations rely on the adviser accurately communicating specific protection needs to clients."

He explains that, for businesses, these needs will typically revolve around protecting the ownership, profits and debts of the business. 

But "without robust and informed planning", Primhak warns the loss or death of a key employee or owner could lead to an "immediate, sustained and often terminal decline in the performance of a business".

A key person for me is anyone whose loss would affect the business.Mehta

Advisers with business clients should be asking them about their business needs, not just their personal needs, although as Paterson adds: "On an individual level, business owners should ensure their personal protection needs are covered, with adequate life and CIC, as well as protecting their income."

I am reminded of a roadshow many years ago, hosted by what was then Axa PPP Healthcare, where advisers in the room were asked if they discuss key person cover with their clients. Approximately 50 per cent raised their hands.

But the presenter then asked: 'And how many of you have key person cover in your own firm?' Only two or three put their hands up. 

Whether for advisers' own businesses or those of their clients, it is worth looking at various tools available from providers, such as business risk and company valuation calculators, as well as case studies and technical documents, to see which option might best suit their business model.

simoney.kyriakou@ft.com