John owns a business that imports and sells specialist technology.  Starting the business from scratch he holds all of the Key Supplier and Customer relationships.  He also has a business loan secured against his family home.  He has three employees; a Warehouse Manager and two office staff, one a personal assistant and the other an administrator who handles the accounts.

John feels he has been proactive about insurance – he has general insurance covering his business, and personal cover on himself. However he has not considered that the insurance he has taken out on himself will not help the business directly.

Let’s take the case of a medical emergency. John has a stroke, is hospitalised and immediately removed from the business and all business decision making. He survives the stroke but there is uncertainty around his recovery and it is unknown when or if he will be able to return to full capacity.

John has been the main contact for all the customers and suppliers to the business; a trusted business partner and advisor in those relationships. He has driven 100% of sales and negotiated all the supply contracts. Without him the business immediately loses its generator of revenue right at the time key supply contracts are coming up for renewal.

John’s team scramble to take up the slack, but the financial situation exacerbates their issues. With No Key Person Cover in place on John the business has no funds to immediately replace lost revenue and to keep up with loan repayments falling due. Nor are there funds to hire a recruitment company to quickly secure and train a competent sales manager who could take over the contracts and pricing.

The business starts to spiral downwards, some contract deadlines are missed and revenue quickly falls until the business can no longer meet its fixed costs. The staff have started to panic and are looking for other work. John’s stressed family have tried to assist but by this time the only value left in the business is the stock. This is then sold at ‘Fire Sale’ prices, approximately 50% of its actual value, to provide some cash to the business to meet lease and loan payments.  This buys very little time. Quickly the loan goes unpaid, the creditor calls in the guarantee, meaning John’s house is now on the line too.

This is a common scenario in the SME business world and it can all take place within six months of the loss of a Key Person.

Sadly even if John makes a full recovery he now no longer has a business to come back to.

The cover John should have had? Key Person Cover and Debt Protection Cover.

Key Person Cover protects the business from the loss of a Key Person through death or disability.  A Key Person can be a revenue generator such as a Sales Manager, a key process driver such as an engineer or manager, or in fact any person whose absence will cause a significant reduction in the business’ profitability and value. 

This type of cover can protect you and your business from the short term loss through to the permanent loss of a Key Person by;
- providing immediate funds for replacing a key person, securing and training them.
- replacing lost revenue during the recruitment and training process and while key business relationships are secured until they are at a similar level to previously.
- maintaining business value and covering business expenses during this time
- ensuring stability and job security for existing staff

All of the above enable the business to continue looking after customers and to stay successful.

If the Business Owner is the Key Person, and is permanently removed from the business, this cover helps maintain the value of the business so it can be sold as a going concern.

Debt Protection Cover is insurance designed specifically to cover a particular business loan; this could be a mortgage the business holds, a loan to a commercial lender, or even a loan to a shareholder.

Business debt cover repays the loan in the event the insured person meets with an early death, suffers from a critical illness or is left totally and permanently disabled.

Ultimately it protects the guarantors of a business loan (usually the business owners) from the liability when, through the loss of a Key Person, the business can no longer make repayments and ultimately is not able to repay the debt.

The risk without this cover becomes even more serious when the debt is secured by the guarantors’ family home.

With the correct cover in place John’s business would have had the funds to find his replacement (potentially from a competitor - offering an attractive package to get them to move), get them up to speed and cover the lost revenue through this process.  The business could have continued trading with relationships and contracts maintained. The business loan would have been repaid, with no need to call in the guarantee against the family home.

If John came back to work he would have a business to come back to; in the worst case scenario, if he passed away, the business would have remained profitable and could be sold as a going concern, to benefit his family.

Have you planned for what happens if your key person suddenly can’t go to work in your business? If you think you need to talk through these options, or have this cover but it has not been reviewed in the last 12-18 months then please give me a call.