PLAN YOUR BUSINESS EXIT
Key Person Protection Planning
People and revenue are the lifeblood of every business and the two are inextricably linked; i.e. revenue depends on people and people depend on revenue.
If a business is to be able to continue trading following the sudden unexpected loss of personnel to a serious life risk (i.e. disablement, trauma or death), it must remain solvent and able to continue meeting its financial obligations as well as maintain shareholder value.
In order to achieve these objectives, it is vital that those personnel central to the business’s continued viability are identified before the fact and the downstream effect of their loss understood and planned for.
The business should have a Business Continuity Plan that ensures that business revenue can be preserved, lost personnel replaced, debts and personal guarantees extinguished (particularly so if required by creditors and lenders) and all other contingencies provided for. These factors are all too often underestimated or overlooked.
Please note: You have a fiduciary responsibility to your shareholders and their families and creditors to immediately address any identified issues for which funding facilities are not presently available. The first and possibly most important issue to address in maintaining your company’s solvency and ability to continue trading, is to ascertain the level of revenue that is at risk and to have a strategy in place to preserve that revenue. In ascertaining this, it must be established who is responsible for the three main tasks of:-
- sales and business relationships,
- management and
- specialist functions.
All business enterprises, whether small, medium or large depending upon specific personnel who are central to their continued viability and success. These are commonly referred to as Key People.
It is common sense to protect business proprietors and their families against the loss of these key people. However, there is also a legal duty upon Company Directors and Trading Trustees that their business remains solvent and able to meet its financial obligations under all circumstances. This would include the unexpected loss of a proprietor or employee who is a key person.
What happens when a Key Person dies, becomes disabled, or suffers a major health trauma?
If the death, disability, or major health trauma of a key person results in a reduction of business revenue, profit or value, the business owners may be faced with one or more of these alternatives.
- Recruit a qualified replacement, quickly.
- Train an existing employee to do the job, quickly.
- Contract work out to a qualified competitor.
- Borrow to fund a reduction in cash-flow quickly.
- Borrow to fund a reduction in cash-flow.
- Quickly sell assets to fund a reduction in cash-flow.
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