For a number of years Legal & General (L&G) has conducted a range of research with owners of businesses of all sizes at different stages of their development and growth. More than ever before legal practices are undergoing significant change; in leadership, succession planning and business structure as the most tax efficient and flexible vehicle is sought.
The research demonstrates a continued lack of awareness of business protection, showing that Partners and Directors have still not fully evaluated the potential risks and the impacts that death and critical illness can have on their business.
For example, the L&G research shows that 53% of businesses would cease trading in less than 12 months if a key person died or became critically ill. This figure has increased from last year’s survey and the following provide further insight:
92% of Small to Medium Enterprises (SMEs) have three owners or less and these businesses would be most affected by the loss of a key person - demonstrating the need to insure them
48% of sole traders have no protection in place at all and loss to these usually means that the business would cease to exist, so what is the impact of a loss of earnings to their family?
Practices with unprotected loans or debts
The L&G report reveals that 65% of businesses have some form of business debt and many of these have no insurance cover in place to repay the debt in the event of death or ill health of a key person. So if one these perils arises what happens if the bank recalls the loan? Is there sufficient capital accessible to repay it? Business Loan Protection can help support a business by repaying outstanding borrowings should something happen to the key personnel covered.
35% of first generation businesses have no cover in place
48% of sole traders have no cover
Average business borrowing is £176,000
20% of borrowing over £50,000 is via a Directors Loan account
39% of borrowing over £50,000 is a business loan
Directors’ Loan Accounts
It is increasingly common for law firms to incorporate, but many Directors are unaware that that a Director’s Loan account needs to be repaid on death. This liability falls on the remaining co-owners, so thought and planning should be given towards how it will be repaid in the event of death.
Individuals who contribute heavily to profits - key fee earners - whose absence would affect the business
Key person protection policies can help protect the profits of a business if key staff or significant fee earners die or become critically ill during the term of the policy. The benefit of this is that the funds could be used to support the business while a replacement is found, including locum, recruitment and training costs. Around half of businesses have no cover in place.
L&G’s research reveals that loss of key personnel would mean that:
73% of sole traders would cease trading immediately
67% of new businesses think their business would cease trading immediately
53% of businesses think they'd cease trading in under 12 months after the death/illness of a key person
Do you want your family to receive the true value of your shares? Or as a remaining owner, do you want to retain control of the business?
SRA rules dictate that on death the shares can only he held by a lawyer, unless the firm is an ABS. Often the shareholders agreement will cater for the business repurchasing those shares, but is there capital available to do so?
A share protection policy is designed to cover the fair value of the shares of the business and to provide the remaining business owners with the funds required to purchase the shares from the deceased’s estate.
Over 50% of business owners have left no instructions in a will, or made any special arrangements regarding shares
1/3rd of Partnerships/Limited Companies have not reviewed the partnership agreement/Articles of association since the business started – many are unlikely to contain the right instructions
26% claim they will buy the business owner's shares, but with what?
Armstrong Watson Financial Planning works alongside Armstrong Watson’s specialist Legal Sector team and recognises the unique challenges facing law firms and helps provide rounded solutions to the potential problems highlighted above.
For impartial, independent advice, please contact Justin Rourke
