Insights

Would Your Business Survive the Loss of a Partner or Key Employee?


One of the key risks for any business is the sudden loss of a business partner or key employee.

Take a moment to think about what would happen to your organisation if a major shareholder, director or key employee died suddenly or became permanently incapacitated.
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What protection does your business have in place against risk events like this?

Risk insurance options for your business

There are two clear options available to shareholders, directors and leaders within organisations. You can either ‘self-insure’ or take out business risk insurance.

1. Self-insurance

Self-insurance is a self-funding risk management method in which a calculated amount of money is set aside to compensate for potential future loss.

Although this may sound like a good option, in today’s economic climate, does your business have the available working capital to fund this?

If you are choosing this method of risk management, do you regularly review the amount you set aside to ensure it is adequate?

Once you have calculated an adequate amount, what happens if the risk event occurs within a short-time frame, before the business has the chance to accumulate enough funds?

2. Business Risk Insurance

There are two types of business insurance that can manage risk – Buy/Sell insurance and Key-Man insurance cover.

Both types of cover help businesses avoid financial strain in the event that a shareholder, director or key employee dies or becomes permanently incapacitated.

How does Buy/Sell Insurance work?

There are two components to this type of insurance. The first is a Buy/Sell Agreement, drafted by a legal professional, outlining the shareholder exit strategy (including beneficiaries and value).

The second component is the Buy/Sell insurance cover – the funding mechanism that facilitates the purchase of an exiting shareholder by the remaining ones, as outlined in their Buy/Sell Agreement.

The proceeds of the insurance are paid to the beneficiary (as nominated in the agreement) and used to purchase the shares in the business.

It is vital that any cover is reviewed at least annually to ensure that the insured value equates to the shareholding value.

What is Key-Man Insurance?

Key-Man Insurance protects a business from the financial consequences of losing a key employee due to sickness, accident or death.

The definition of a “Key-Man” is a senior employee or business owner who is in a critical leadership, sales or operations role, and whose absence from the business would have a serious (potentially catastrophic) financial impact on the business.

Key-Man insurance can fund a replacement employee, either on an interim or permanent basis, so that any business interruption is minimised.

In today’s economic climate, most organisations choose the business risk insurance option. At Vantage, we have assisted a wide range of clients mitigate the financial impact of losing a business partner or key employee through correctly structured Buy/Sell and Key-Man insurance cover that meets their business needs.

Simon Barwick is a director of Vantage Group company Vantage Financial, a boutique financial services firm that provides tailored strategies to help clients achieve what matters most to them.

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