The importance of protecting your family business against unexpected events

In every business it is essential to have protection in place again issues that may arise as a result of unexpected and unforeseen events that could have a detrimental effect on the business.

This is even more of a consideration for a family business, as in a family business, often the family members are the people in the organisation with the knowledge that is vital to the success of the business. Generally these people play a key role in the family business and are the ones who bring in the most revenue to the business.

The death or critical illness of a member of the family business will undoubtedly have considerable implications for the business including business interruption, loss of revenue, lack of specialist knowledge to name a few and all of which could create issues for the family business.

How do you protect your family business from these unexpected and unforeseen events and to ensure continuity and financial security?

There are a number of options that, albeit additional costs to the family business, give you protection and peace of mind for the future.

3 options that should be considered in any family business:

Key-Man Insurance:

In a family business, certain individuals may play crucial roles in the company’s success, whether they’re the founder, key executives, or experts in critical areas. Key-man insurance helps safeguard the business against financial losses that could occur if one of these key individuals were to pass away or become incapacitated.

Losing a key person in a family business can disrupt operations, relationships with clients, and overall business stability. Key-man insurance provides funds to help cover costs associated with finding and training a replacement, ensuring that the business can continue operating smoothly during a transition period.

If the family business has outstanding debts or loans, key-man insurance can provide the necessary funds to repay these obligations in the event of the key person’s death or disability, preventing financial strain on the business and family members.

Life Insurance:

Life insurance provides a financial safety net for the family members and dependents of business owners or key individuals. In the event of the insured person’s death, the life insurance playout can help replace lost income, cover ongoing expenses such as mortgage payments or education costs, and maintain the family’s standard of living.

Life insurance can be an essential tool in estate planning for family businesses, especially when it comes to passing down assets or ensuring equitable distribution among beneficiaries. The death benefit from a life insurance policy can help provide liquidity to cover taxes, buy out non-active family members’ shares in the business, or facilitate the transfer of ownership smoothly.

Critical Illness Cover:

Critical illness cover provides financial assistance to the insured individual and their family in the event of a serious illness or medical condition. For family businesses, this coverage can help alleviate the financial burden associated treatment, rehabilitation, and lifestyle adjustments necessitated by the illness.

If a key individual in the family business is diagnosed with a critical illness, it can have significant implications for the company’s operations and finances. Critical illness cover can provide funds to cover expenses related to hiring temporary staff, restructuring operations, or adapting the business model to accommodate the individual’s absence while they focus on recovery.

In summary, key-man insurance, life insurance, and critical illness cover are essential components of risk management and financial planning for family businesses. These insurance policies help protect the business, its owners, and their families from unforeseen events that could jeopardise financial stability and continuity of operations. Whilst they can be an expensive initial and ongoing outlay for the family business, ultimately, the benefits and protection these policies can offer the family business outweigh the costs.

To discuss your family business real estate, please contact Jennifer Davidson, by email jdavidson@gilsongray.co.uk or visit our service page.