Business protection is about making sure a company can continue operating if something unexpected happens to an owner, shareholder, director or other key person.
For business owners, personal wealth and business wealth are often closely connected. A significant proportion of your net worth may be tied up in your company, while the business itself could depend heavily on a small number of individuals. Financial planning can help identify these risks and put arrangements in place to protect the company, its owners and their families.
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What Is Business Protection?
Business protection typically combines insurance, financial planning and legal agreements to reduce the financial consequences of death or serious illness within a company.
The appropriate protection depends on the structure of the business, its borrowing, shareholders and how dependent it is on particular individuals.
It can include key person insurance, shareholder protection, business loan protection and insurance designed to provide benefits for directors and employees.
Key Person Protection
Some businesses depend heavily on one or two people.
This could be the founder, managing director, a leading salesperson or somebody with specialist technical knowledge or important client relationships.
If that person dies or becomes seriously ill, the company could lose revenue while facing the cost of recruiting and training a replacement.
Key person insurance can provide the business with a lump sum following a qualifying event. This money could help replace lost profits, recruit another employee or simply provide additional working capital while the company adjusts.
Shareholder Protection
The death of a shareholder can also create problems for a privately owned company.
Their shares may pass to their beneficiaries, who might have little interest in being involved with the business and may prefer to sell their stake.
The remaining shareholders, meanwhile, may want to buy the shares but not have enough cash available.
Shareholder protection can combine insurance with an appropriate legal agreement so funds are available to purchase the shares. This can help the remaining owners retain control while providing the deceased shareholder’s family with value for their holding.
Protecting Business Borrowing
Companies can have substantial loans, overdrafts and other financial commitments.
Some borrowing may also be supported by personal guarantees from directors or shareholders.
Business protection can provide funds to repay or reduce certain debts following the death or serious illness of an important individual, helping to protect both the company and potentially the individual’s estate.
Existing protection should be reviewed periodically as borrowing and the value of the business change.
Planning to Sell Your Business
Business protection and financial planning also become particularly important when preparing for an eventual sale.
Before selling, you should consider how much you actually need from the business to achieve your personal financial objectives.
Saltus recommends planning ahead rather than simply focusing on achieving the highest possible sale price. Cashflow modelling can demonstrate the level of income sale proceeds could potentially provide and how major expenditure or gifts could affect your longer-term finances.
Consider Tax and Estate Planning Before a Sale
Selling a business can significantly change your estate and tax position.
Saltus highlights inheritance tax as an important consideration because qualifying business shares may benefit from Business Relief, while cash received following a sale may be treated differently. This means it can be important to consider estate planning before completing a transaction rather than afterwards.
Tax rules are complex and can change, so specialist tax advice may be required alongside financial planning.
How Can Financial Planners Help Business Owners?
Financial planners like Saltus provide financial planning and investment management for business owners, including those approaching or completing the sale of a company.
Saltus can use cashflow modelling before a business sale to establish how much you may need from the transaction to support your future lifestyle. This can include modelling future income requirements alongside major purchases and gifts to determine how much capital you may need.
Planning can then move from accumulating wealth through a business to managing the proceeds personally. Saltus suggests business owners think carefully about how much risk they take after selling, particularly if they are considering investing some of