It doesn’t take a genius to figure that many small and medium sized businesses will be struggling right now. Many will have seen their capacity to trade restricted and even though they may have been able to furlough their employees and therefore avoid some of their typical fixed costs, the bottom line is likely to mean reduced or no net profits after tax. Of course, there may be losses too.

Crucially, for directors dividends are paid from net profit after tax and so if there is either a reduction in or no net profit left after paying the tax man, directors are going without remuneration (aside perhaps from a minimal salary).

Government Support

For many, the solution to this has been to take advantage of the “Bounce Back Loans” (BBLS) and “Coronavirus Business Interruption Loan Scheme” (CBILS). However, how many businesses have taken a moment to consider protecting these loans against the risk of further disaster?

Death of a Director

You could be forgiven for thinking that things couldn’t get any worse! They could and sadly for some they will. Let’s face it, the normal risks that business are subjected to don’t go on holiday during COVID-19. It might even be fair to say that death of a director is more likely at this time.

Should a business have to deal with this as well, they will need a lot of help to make it through. The mountain the business has to climb just doubled in size!

No Cash For the Family of the Deceased

Even putting the company’s problems to one side for a moment, the family and estate of the deceased could be left horribly short of money.

At this point, the deceased directors shares have likely passed to the spouse. If the shareholding was a minority stake there may be no opportunity for this to generate an income. The remaining directors may have no capacity to pay dividends and in fact may revert to paying themselves a salary only (which the non-working shareholder is not entitled to).

The spouse can hardly sell the shares to any third party. The market for them will be non-existent under the circumstances. At the same time, should the existing directors bust a gut to steer the business through the recovery they may not welcome giving up a percentage of the value generated to the non-working director. They will want those shares back. They’ll need money to do it and an agreement that provides a fair value that both they and the family of the deceased agree on.

Each Could Get What They Need

If this had been considered ahead of time as part of a properly constructed share protection plan then that is exactly what could be available at this point. A life policy would pay a lump sum to the other directors for them to buy back the shares, giving them back full control and allowing the mourning spouse the much needed compensation.

What Else Does The Business Need?

To steer the business out of the pandemic the last thing the directors need is the millstone of any ongoing debt repayments. Remember, aside from any BBL, CBILS, bank loans or overdraft facility, there is often a directors loan for the deceased director that needs to be repaid on demand.

Certainly, without being paid dividends and if not compensated for the value of the shares, you can be sure the family of the deceased would indeed demand repayment of the directors loan! This alone could be for tens or hundreds of thousands. In the Legal and General “State of the nations SMEs” study for 2019 the average amount owed to directors in loans to businesses was £169,000.

Without a Business Loan Protection life policy to facilitate this loan repayment the business could instantly be insolvent. Compared to the potential consequences of not protecting the business in this way the premiums will be a drop in the ocean. Of course, no business wants extra costs in difficult times however, there is a responsibility to assess and manage the risks that could bring the business to an end. There are too many stakeholders to overlook the potential solutions.

Moving Forward

The surviving directors are likely going to need to replace their lost colleague. A Key Person Insurance would give them the financial power to go out and find an interim replacement whilst a more permanent solution is sourced, trained and assimilated.

The reduced profits could be elevated with Key Person Cover as part of the lump sum paid on death can be used to buy the company time, plug the hole in profits whilst recovery is managed.

It all seems so simple

In many ways it is. Like any insurance, it can be an absolute lifeline but for that to work it requires the foresight and the assessment of business risks to have been carried out ahead of time.

Too few businesses have fully considered the biggest risks that they might face. If they do however, they are well placed to have a business that stands the test of time.

Do something today. These risks can be managed.

Talk to Integra

Written by Gavin Culverhouse

Tel: 0117 251 0083 (option 2)

Email: gavin@integraf.co.uk