subject: £8.8 Billion Protection gap for West Midlands businesses [print this page] 8.8 Billion Protection gap for West Midlands businesses
A recent survey conducted by Legal & General has shown that there is a business protection gap of 1.1.trillion in the UK business market. This comprises of 300 billion in Corporate debt, 400 billion in Shareholder protection and 400 billion in key person protection. These figures were calculated by conducting research amongst 1000 members of the British Chamber of Commerce in April 2009, the first time in four years that any organisation has published an update to Swiss Re's widely cited research from 2005 that highlighted a business protection gap of 500 million. The study showed that 45% of business owners say their business would fold within 12 months of the death or critical illness of a key person. However only 4% of business owners questioned said they have shareholder protection in place and only one in two (48%) do not have any formal agreement to establish what would happen in the event of death of a business owner. 51% of the businesses surveyed have corporate debt yet just 38% of these businesses have life or critical illness policies in place to cover that money owned. The responses to the research covered a large geographical spread with 8% of the members being based in the West Midlands, this would equate to approximately an 8.8 billion business protection gap for businesses based in the West Midlands.
Most business owners seem to be unaware of the potentially disastrous consequences that may arise in the event of the death of one of the shareholding directors or partners in the business, not only the impact on the business but also the impact on the family of the deceased.
A high profile case that highlighted this occurred following the tragic death of the ex Chelsea honorary president Philip Carter who was the CEO and 20% shareholder of the training services business Carter & Carter. Prior to his death the business was valued at 500 million with a share price in excess of 12 and yet within a year the share price had plummeted to 89p and the business went into administration. Not only did his wife suffer the tragedy of losing her husband and their young son but also the value of his shares in the business reduced from 100 million to virtually 0 in the space of less than a year. Although there were several reasons for the collapse, one of the factors would certainly have been the fact that Philip was the entrepreneur and driving force behind the business and his loss would have impacted on the Company's creditors, bankers and customers.
A key person and shareholder protection arrangement would have not only enabled the business to survive but also ensured that Philip's estate would have received a fair value based on his shareholding in the business. A shareholder protection arrangement works by essentially paying out a lump sum in the event of death of one of the shareholders into a shareholder trust set up by the business; the beneficiaries of the trust are the shareholders of the company. The funds can then be used to purchase the shares from the deceased's estate enabling the remaining shareholders to retain complete control of the company and at the same time ensuring that the deceased's estate receives a fair value based on their shareholding. To ensure that the transaction of purchase and sale is enforced a cross option agreement is put in place resulting in either party forcing the other party to comply with the agreement. In addition a key person arrangement can be used to pay off existing debts and cover the cost of finding a suitable replacement. Considering the potentially disastrous consequences of not having any cover in place and the relatively low cost of setting up these types of arrangements it should be an integral part of any business that has more than one shareholding director or partner. Why would you operate and try to build your business without it?
