As a business owner, your business will likely be one of your most significant assets. Often, it provides the main source of income and a legacy, something you will have put blood, sweat, and tears into building. We all think it will never happen, but have you ever considered what would happen to your business if you were no longer here?
Most people want to avoid the topic of death, and it’s not a great topic of conversation, but failing to plan for it can leave your business, employees, and loved ones in turmoil. Contingency planning is not about preparing for the worst-case scenario—it is about protecting the value of your hard work, ensuring a smooth transition, and ensuring your family receives the value they deserve for your hard work and effort.
Why Contingency Planning Matters?
Without a plan in place, your family and your business will face significant challenges; these can include:
- Leadership Gaps: Who will take over the day-to-day running of the business? Do they have the knowledge to take over?
- Financial Instability: Does your business depend on you to generate income? Can it operate financially without you? Would key supplier payments be able to be made?
- Legal Complications: What will happen to your ownership stake or shares?
If left unanswered, these fundamental questions can lead to confusion, disputes, and, worst case, the dissolution of your business.
What are the key steps for Effective Contingency Planning?
Draft a Will
Your Will is the cornerstone of your estate plan. It allows you to determine who inherits your business and under what terms. Without a will, your business assets will be distributed according to UK intestacy laws, which might not align with your wishes. This needs to be written in conjunction with the terms and conditions in your Shareholder’s agreement.
Appoint a successor
In most cases, you will be the driving force behind your business. It is, therefore, fundamental that you identify and prepare a successor. This could be a family member, an employee, a business partner, or even a business owner you know and trust who operates within the same industry. You need to ensure that they are equipped with all the information necessary to operate within the role.
Put a Shareholders’ or Partnership Agreement in Place
If you co-own a business, a shareholders’ or partnership agreement will outline what happens in the event of a shareholder’s death. This can include:
- Buy out provisions for the remaining owners
- Agreed valuation method for shares
- Rules for transferring shares to family members
There are several reasons for having a Shareholder agreement, which we covered in our previous blog post. Having a defined process can protect all parties involved.
Consider a Lasting Power of Attorney (LPA)
A business LPA allows you to appoint someone to make decisions on your behalf if you’re incapacitated. While this is mainly used temporarily, it should form part of your broader contingency plan.
Insurance can provide a safety net.
Putting insurance policies in place can be a strategy to protect all parties involved with your business. The business can also pay for these costs if the right policies are in place.
Key Person Insurance
Key Person Insurance provides the business with a lump sum payment if a critical person, such as the owner, passes away. This can help cover debts, recruit replacements, or manage cash flow during the transitional period.
Life Insurance / Critical Illness
Life insurance can ensure that your family receives a lump sum on your death, and a Critical illness policy can pay a lump sum should illness prevent you from continuing to work. What is covered and the amount paid depends on the provider and the policy.
In most cases, your business will be the main source of your family’s income, so this is a fundamental consideration when contingency planning. Specific relevant life policies are allowable business expenses.
Shareholder Protection Insurance
Where a business is co-owned, Shareholder Protection Insurance allows the surviving shareholders to buy out the deceased’s shares, ensuring that the business remains operational while returning a fair value to the family.
Communicate your plans
Communication is fundamental throughout developing a contingency plan; once in place, all relevant parties must be aware of the contingencies you have put in place. There is little point in having a Will if no one knows where it is. Key parties include:
- Shareholders, directors or partners
- Key employees
- Family and beneficiaries
- Your solicitor
- Your financial advisor
Involving everyone and communicating throughout ensures that everyone understands your wishes and prevents confusion during what is already a challenging time
Have you considered the cost of inaction?
Whilst no-one wants to think about the inevitable failing to plan for your death can have severe consequences:
- The forced sale of your business to cover its debts or inheritance tax
- The closure of your business due to a lack of leadership
- Prolonged legal battles between your family or business partners
All of these outcomes will result in a lower overall value of your estate, which will ultimately result in your family not getting the inheritance that truly reflects your hard work.
Seek professional advice
Contingency planning involves legal, professional and operational considerations. Consulting with your solicitor, accountant, and financial planner ensures that your plan is robust and tailored to your personal and business situation.
Conclusion
What if planning is one of the most responsible steps you can take as a business owner. Planning is not about protecting your business, it is about providing peace of mind to your employees business partners and loved ones.
Don’t wait for the unexpected to happen then key parties attempt to navigate through the complexities left behind. Contingency planning secures the future of your business and the people who depend on it.
Spotlight Accounting Limited
Spotlight Accounting Limited is an accounting partner for SME’s based in the UK, we work with business owners throughout their business journey, part of what we do is asking the awkward questions to make sure that all eventualities are covered.
