Running a successful and profitable company is difficult at the best of times, and in today’s economic climate, we are clearly not in the best of times.
It is easy to overlook the importance of business continuity and succession planning, although arguably it is in these difficult times when the need for them is greater than ever.
The impact on a business following the death or critical illness of a director / partner will probably be a stressful time, and even more so where no consideration has been given to coping financially with either of these two events. It is most likely that a director / partner will have a financial interest in the business as well as performing a key role towards the profitability of the business.
A look at the following statistics below shows the likelihood of at least one director / partner dying or getting a critical illness before age 65.
Likelihood of at least one director / partner dying before age 65.
| Age | Number of partner / directors | ||||
| 2 | 3 | 4 | 5 | 10 | |
| 35 | 13% | 19% | 25% | 30% | 51% |
| 40 | 13% | 18% | 24% | 29% | 49% |
| 45 | 12% | 17% | 23% | 27% | 47% |
| 50 | 11% | 16% | 21% | 25% | 44% |
Likelihood of at least one director / partner getting a critical illness before age 65.
| Age | Number of partner / directors | ||||
| 2 | 3 | 4 | 5 | 10 | |
| 35 | 50% | 65% | 75% | 82% | 97% |
| 40 | 49% | 64% | 74% | 81% | 97% |
| 45 | 47% | 62% | 72% | 80% | 96% |
| 50 | 44% | 58% | 68% | 76% | 94% |
Source: AEGON
It is all too common to say, “it is not going to happen to me”, however the statistics above demonstrate the probability is much more likely than we all believe.
In a survey of directors carried out by Legal and General last year, 58% of respondents claimed not to have formal agreements on the death of a director, 41% said that they have no provision for protecting cash flow, 37% think the remaining shareholders would buy the business, 33% had no provision to purchase the shares of a deceased director and 21% believed that the business would cease to trade.
As part of your business continuity and succession planning, you should consider what financial impact could occur in the event of a director / partner dying or getting a critical illness, including:
- Does your business have the correct agreements and capital to provide the remaining directors / partners with peace of mind?
- What is the financial impact (loss of turnover / profit)?
- What is the impact of losing specialist skills or vital contacts and relationships?
- What happens to any corporate loans – can they still be serviced and will the institution require the funds to be repaid?
- What additional expenses may occur, such as recruiting and training someone to fulfil a director’s role?
If having considered the questions above, you have any concerns about how you would cope, or cannot confidently demonstrate viable and realistic planning to meet the financial impact of the death or critical illness to directors / partners and or key individuals, then please give us a call. You may find our liability audit helps you understand your needs.
