For the majority of business owners in the UK, the Covid-19 pandemic and the enforced lockdown of the last few months will have provided challenges we never could have imagined having to deal with. The health crisis has impacted every sector within the UK, but one hit particularly hard has been the Hospitality, Leisure and Tourism sector.
After the storms of Ciara and Dennis back in February 2020, many of us were looking forward to the warmer weather of spring and the opportunity to get back outside and enjoy the best of what the UK Tourism sector offers. Sadly though our plans have of course been delayed, and the lockdown has resulted in months of cancelled booking for hotels, tourist attractions, holiday cottages, caravan parks, campsites and all parts of the sector. Even now as the initial restrictions start to ease, social distancing will undoubtedly affect the numbers of visitors, which will in turn impact on profitability or even their viability.
One thing the crisis has taught many of us is not to take our health for granted, both physical and mental. Another aspect to this is the importance of planning. There are many things we can plan for and occasionally things we can’t, but one thing we should always do is have plans in place to limit the negative impact that even the most unforeseen events can cause.
A number of businesses within the Hospitality, Leisure and Tourism sector are family run, and may have been passed down the generations, and as such become more than simply a business to their owners, they’re often a way of life. Most proprietors generally have an idea about what they’d like to happen to their business once they’ve retired or if they died prematurely, but frequently there isn’t a formal succession plan in place to ensure that this would happen. This has the potential to cause serious issues for the future of the business.
What Are The Implications?
If a co-owner dies or falls seriously ill, how do they ensure that their shares are distributed in accordance with their wishes? If there is nothing in writing stipulating exactly what is to occur this presents a challenge for those left running the business, or for their remaining family. Should this happen at a point during this crisis then it could have an even more devastating impact.
For a limited company, this could be detailed in the Articles of Association and for Partnerships and Limited Liability Partnerships, in a Partnership agreement. Many business owners haven’t reviewed these since they were first created, so it’s important to do so to ensure that what you want to happen on death, or serious ill health, can actually be put in place.
If no formal arrangement is in place then the shares will be left to the surviving spouse or legal next of kin, but if the intention is for the remaining business owners to take over the shares, a formal agreement needs to be put in place. Arrangements should be formalised as to how the shares are to be paid for and how the family is remunerated to ensure a smoother transition for the business.
How Can This Be Resolved?
A simple solution is for each owner to take out an insurance policy for the (fair) value of the shares, the proceeds of which could be used to purchase them from the deceased ( or the insured in the event of serious illness). Each policy would require a specific trust form and accompanying cross option agreement. These would ensure that the sale of the shares is legally accommodated.
A claim on a policy would result in the sum assured being paid out to the trustees, who now have the funds available to purchase the shares, putting the money in the hands of the family and the shares in the hands of the remaining business owners.
This is a simple and effective way of covering the liability should death, or serious illness, occur.
At Armstrong Watson we are Chartered independent financial advisers and can discuss and advice on all aspects of a clients protection requirements based on their individual circumstances. As all our expertise is “under one roof” we also work alongside our Tax advisers to ensure the right support is in place for the businesses and business owners we support.
For advice on protecting your business, insurance policies and succession planning, please call Marcus Dodds on 07584 294529 or email at marcus.dodds@armstrongwatson.co.uk.
