The Benefits of Business Protection


business_protectionBusiness protection is essential where the death of company owners can put the entire business at risk. There must be an exit strategy for every critical individual, so that should they leave the scene unexpectedly there are facilities in place to ensure the continuing smooth operation of the business. An experienced financial advisor can help you navigate this.

Even the potential disability of principals of the company should be catered for by means of a disability buyout policy. When important directors or business owners become disabled and are unable to continue their normal work, disability buyout insurance will help ensure that they will be given a fair payout for their share of the business.

Not only that, but all business co-owners will feel more secure that buyout insurance is covering their financial liability for the fixed buyout price offered to the owner, and that it has been agreed through a legal buy/sell agreement.

Life Insurance and Buy/Sell Agreements

Life insurance policies may be taken on the lives of all company owners and directors in order that the costs of buy/sell agreements are covered in the event of the death of any directors or co-owners. Such agreements help prevent less capable heirs from taking their place on the board. The loss of key employees is often devastating to businesses, and life insurance can be used to help make up for any loss of profits until a suitable replacement is found for the deceased.

Inexperienced heirs insisting on their position on the board can be disruptive to business plans and co-owners that inherit their positions can cause untold difficulties by insisting on liquidating their share of the company to competitors.

Executive Bonus

Another form of business protection is to help ensure the loyalty of existing directors and key employees by offering them an attractive and very competitive financial package. Most other businesses also recognize this, and the executive bonus market is becoming almost as competitive as the general remuneration package itself. By offering an attractive executive bonus to key personnel, a company can help retain those employees that are regarded as critical to the business's continued profitability.

The three Rs: reward, retain, recruit, are the cornerstones of the success of most enduring businesses, and prudent business owners are aware of what is needed to maintain each of these factors in a way that is beneficial to their company. Some even maintain a fund to finance executive bonus and employee reward schemes.

ESOP Sinking Fund

ESOPs are qualified plans, typically profit sharing plans, which must invest primarily in the stock of the sponsoring employer. ESOPs are created by business owners to achieve three ownership objectives:

1. To cash out of the business at fair market value;

2. To minimize tax obligations on the sale; and

3. To reward and transfer company ownership to kep employees.

Funds are needed either to:

1. Meet the ESOP's obligation to pay for shares purchased, or

2. Fund buyout of shares from employees.

If obligations have not been funded prior to the business owner's transfer of ownership, the ESOP must typically borrow funds. This not only impacts the company's ability to grow and expand, but the owner's assets may also be held as collateral for securing the ESOP loan.

Business Owner Insurance

Each of the above forms of business protection are a form of business owner insurance, although such insurances can be tailored to suit individual and specified circumstances. The main objective of most forms of business protection insurance, disability buyout and agreements such as buy/sell agreements, executive bonus arrangements and ESOP sinking funds is to insure the company against the loss for any reason of the company owners or stockholders. This helps enable the business to continue operating and to also to protect the company from external influences through unplanned stock acquisitions arising out of inheritances or other means.

One of the major purposes of buy/sell agreements and disability buyouts, for example, is to prevent inexperienced relatives of major stockholders from gaining voting rights on the board or even to take control of a major part of the company just through their relationship with the previous board member or co-owner and so exert an untrained and inexperienced influence on the business.

The majority of small businesses that are directly owned by individuals, particularly those with co-owners, are advised to set up such arrangements and exit strategies for those individuals with a significant influence on the company. Sufficient funds must be secured through such arrangements and insurances as to at least maintain the business overhead and to enable the company to continue trading until the situation had been satisfactorily resolved.

When doing this, the advice from a company experienced in this type of work would be invaluable in ensuring that that the agreements and arrangements are suitable for the business and are offering the most appropriate forms of business protection.


This material is being provided for informational purposes only. Neither EMA Financial and Insurance Services nor its agents provide legal, tax or accounting advice. Please contact your own advisors for legal, tax and accounting advice.


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