A business owner’s share in the business is likely to be their biggest financial asset and key employees contribute immensely to maintaining market value. A key employee can be anyone whose critical illness or death can have a major impact on business valuation and continuity.
Businesses are run employees key to their success and profitability, and most would be adversely affected if one of these people were to suffer a critical illness or die. A key employee is anyone whose illness or death would have a major impact on the business’s continuity, its financial status and future profits. They do not necessarily need to be a significant shareholder.
Some of the major problems associated with the critical illness or death of a key employee include loss of sales, loss of confidence in the business, loss of competitive edge, failure to deliver on major projects and withdrawal of credit facilities. In addition, there can be unnecessary strain on colleagues as well as recruitment and retraining costs.
According to the World Health Organisation, 9,700 people died in the UAE between 2000 and 2012. Two thirds of these deaths were due to three main causes – Cardiovascular Disease (30%), Accident and Injuries (23%) and Cancer (13%). The Dubai Health Authority announced in 2011 that cardiovascular disease was the leading cause of death in the Emirate, with one in every five deaths attributable to cardiovascular diseases.
While these deaths were no doubt devastating for the families involved, the critical illness or death of a key employee could have wider implications for a business. It could affect its ability to obtain finance and impact commercial loans, directors’ loan accounts and any personal guarantees the key employee has given on behalf of the business.
SMEs need to take steps to protect key employees for the benefit of shareholders and to ensure continuation of the business. Business protection plans, based on a suitable legal arrangement, can provide a simple way to protect the interests of everyone connected with a business.
“Business owners tend to insure the things they consider vital to keep their businesses running in the event of a disaster. What we find though is that their greatest asset – their people – is overlooked when it comes to protection planning. For example, while most companies have insurance for their office building and their office equipment, they have no cover against the critical illness or death of their key employees, directors, partners or major shareholders. Businesses need to be more aware of the implications and the potential risks of not covering their key personnel,” said Marcus Gent, Managing Director Middle East and Rest of the World at Friends Provident International.
The plan most often used to provide life cover for businesses is Term Assurance, the duration of which can be tailored to the individual key person scenario. For example, if the key person is a project leader it should be possible to identify how long they will remain in their role, and a policy effected for that length of time. For other types of employee it may not be easy to identify how long they are likely to remain fundamental to the continued success and profitability of the business; and they may not stay in the same position for a long period of time as assistants, successors, or other experts may join the business to share their responsibilities.
“The Middle East is home to some of the most entrepreneurial and technologically advanced businesses in the world, but in our experience few recognise the problems that could arise following the death or critical illness of a key member of their organisation. Term Assurance is an inexpensive plan, that when set up appropriately can help them mitigate the impact of the death or critical illness of someone key to their business” said James Panton, Unlimited Underwriter and Regional Technical Development Manager at Friends Provident International.
“I’ve heard of a situation in the UK some years ago involving an IT company, where one of partners – the technical expert behind the success of the partnership – died. Unfortunately there were few business assets to liquidate to pay the deceased partner’s family – who did not want to be involved with running the business – for his share of the business. The bank was not willing to make a loan to the remaining partners as they did not see the business as viable without the technical expert. The business was eventually forced to wind up, meaning that everyone lost – the business owners, their employees and the family of the deceased partner.
Had the company put a suitable business protection plan in place, this sad situation could have been avoided. The business would have been compensated for the loss of the key employee and could have used the funds to pay his family for his share of the business, and to recruit a replacement, enabling the business to continue.”
Business protection in the form of life insurance can help enterprises protect themselves against the problems arising from the critical illness or death of a key employee, and ensure the business is able to continue. Such life insurance plans are relatively simple to effect- and are a cost-effective way for a business to safeguard its future.