In a world where nothing is certain but death and taxes, it's wise to protect yourself and your business partners against the consequences of death and critical illness. Richard Lishman explores your options
Benjamin Franklin once said, 'In this world nothing is certain but death and taxes'. While we can make plans in advance to mitigate the latter, the former is unavoidable and sometimes comes when we are least expecting it. Hopefully for most it will be long after our allotted four score years and 10, however for a few it will be during their working lives. The trouble is, we don't have a crystal ball to see who it will affect or when.
For business partners who have not planned for this possibility, it can provide serious problems for both the continued running of the firm, and for the proper succession of the laboratory share.
Business as usual?
People who run businesses, whether trading concerns or professional practices, are constantly juggling their income against their expenses, and hopefully if the former exceeds the latter, they make a profit and get paid! The problem is that the death of your business partner, or indeed any of your key employees, could have a serious effect on your income, yet overheads carry on as before.
Staff need paying, rates, rents and leases have to be met. Loans and mortgages still need servicing and, if they can't, may be recalled by the bank. Trade creditors may be unwilling to extend credit and require payments in cash. Clients might well go elsewhere for the services they need to fulfil their patients' expectations.
How many extra hours will the remaining partners have to put in to maintain cash flow and what will be the effect on their health and family commitments? How long will it take you to bring in another technician? Will it be someone you can work with? Will they have the money to buy in as a partner? Will they have the same relationship with clients?
Are you running an intestate business?
Not only will the remaining partners lose that individual's skill and input into the profits of the business, but they also could find themselves having to pay out a substantial sum of money to his or her estate. A lot will depend on the partnership agreement, if indeed there is one!
If there is no agreement, the Partnership Act of 1890 dictates that the partnership dissolves and the deceased partner's share may have to be paid out to the estate. This might mean finding thousands of pounds at a time when you have just lost one of the profit sources of the laboratory. In effect, you would be treated as having an 'intestate partnership'.
If there is an agreement, then hopefully it will dictate what should happen in the event of death, retirement and illness. The answer is to read it, but whatever it says, it is unlikely magically to produce the cash needed to carry it out.
Assuming that you and your partners would want your dependants to benefit from the value of the business you have built up, it is essential that sufficient cash is available to achieve your aims. Obviously it would be impractical to have liquid assets in the business just for this purpose, so far better, and cheaper, to let the insurance company create the liquidity for you, when you need it.
In sickness and in health
So far we have talked about the death of a partner. However, a serious illness or disability could have a similarly devastating effect, or in some cases an even worse outcome. Additional complications might arise where a sick partner may well need to carry on taking profit from the business, while unable to create any income, or may want to take early retirement and expect to be bought out.
Again, any agreement should set down as to how these situations are to be dealt with and ensure that an afflicted partner has an alternative income source such as income protection or locum cover, and the laboratory has a cash injection to cover any potential losses.
The business will
The solution is a 'business will', which sets out clearly what will happen on the death or illness of a partner. It should provide sufficient insured cash to the surviving partners to provide working capital until a replacement is found, as well as for the purchase of the partnership share from the estate. It should cover 47both the death and serious illness of a partner. Any key employees should also be covered under a 'key person policy' taken out for the benefit of the partnership.
I need advice
If the partnership already has cover in place, which may well be the case with loans from the bank, then seek professional, specialist independent financial advice to check the correct cover is in place – you may even be paying too much for your cover or be over-insured. The review should also check if premiums are in line with market rates.
Most business owners would consider it very foolhardy not to insure their tangible assets against dangers such as fire and flood. Most would also cover themselves against the consequential loss of profits they would suffer while waiting for those assets to be replaced. Doesn't it also make sense to cover the most important asset of all – the people who actually create the profit in the first place?
Take a look at your laboratory and ask yourself: 'Are we indulging in unprotected success?'