Written by: Steve Settle, Partner at Select Investors
We all heard Newton’s Third Law of Motion when we studied physics at school – “for every action, there is an equal and opposite reaction.” Increasingly, we see that this principle of opposites applies pretty much everywhere with day and night, right and wrong, left and right and in the investment and business world with risk and reward.
Reward excites us and triggers a bias to action, whereas risk causes us to pause, to reconsider and often to procrastinate. We are attracted to reward, whilst risk is the other side of the coin that needs to be taken into account when making a decision.
Any entrepreneur and SME business owner can reflect back to when they started their venture and recall their reasons for doing so. The reasons are often not purely for financial gain and may reflect aspirations for greater control over one’s work, perhaps more freedom or even to make the world a better place. It is important that these reasons are kept top of mind because as is often recognised that running and building a business is no easy task. There are constant challenges and trade-offs required and these change as a business scales up and becomes more complex. At the time the business was launched, there may well have been a Business Plan drawn up (perhaps to raise funding) which included a SWOT analysis which identified the risks present at that time before the decision was made to proceed. Gradually the business evolves as do the associated risks and so it is important to regularly review the risks that a business faces and to take steps to address them. Failure to do so could be disastrous – I recall the instance when three friends started a business, and the initial arrangements were very informal (they were friends after all). In time they all got married and the business flourished. All was progressing well until life got in the way as it tends to do and one of the founders died. With no shareholders’ agreement in place, the surviving spouse had no claim on the business and for whatever reason, the remaining founders cut her out!
While most people will insure their car, their phone, their holiday and their house, surprisingly few business owners take out the necessary protections to guard against the worst happening. Having the right insurance policies in place can save you and your family enormous amounts of stress and money – if things don’t work out as planned for your company. Yet many entrepreneurs don’t even consider taking a few simple steps to protect their business and therefore risk being stung further down the line.
Indeed, 59% of businesses would cease to trade within 12 months if they lost a key person, according to a report by Legal & General,1 yet many companies don’t have key-person protection in place. For newer businesses, 33% would cease trading immediately if they lost a key person. Furthermore, the same research shows that 75% of businesses have some form of debt, yet many haven’t taken out business loan protection. Almost two-thirds (64%) haven’t heard of a relevant life plan, a key policy that companies can take out to provide life insurance to individuals.
Starting a business is inherently risky, so it’s vital to have the right protections in place – even if it can be uncomfortable to think about your plans being derailed by unforeseen events such as illness. Plus, taking out the relevant policies can help protect your family’s future as well as your own.
If you’re just beginning your business journey, there are must-have protections such as critical illness cover, life insurance and professional indemnity insurance. As the business grows, there are others that become more important, which are outlined below. It’s easy to shrug off the need for protection by thinking you’re unlikely to suffer from adverse events – or believing that if you do, your personal savings or cash in the company will cover it. That can be a dangerous and costly attitude.
“It won’t happen to me” isn’t something you can rely on.
It is critically important to consider the main business protections outlined below:
- Shareholder protection: Also known as business succession planning protection, this ensures other owners of the business (the shareholders) can keep control of the company if one of them dies or is seriously ill.
- Business loan protection: Most businesses have some form of debt, especially in the wake of the challenges posed by COVID-19, so it makes sense to put a policy in place that helps meet any outstanding financial commitments should you become critically ill or die.
- Key-person protection: This recognises key people in the company and the impact on profits if one of them becomes ill or dies. A key person can be anyone who can be justifiably described as integral to the business.
- Relevant life insurance: This is a tax-efficient form of life insurance taken out by the company for an employee, which pays a lump sum to the employee’s family if the person covered dies or is diagnosed with a terminal illness.
- Group schemes: By introducing employee benefits such as income protection, critical illness cover and private medical insurance, you support the financial wellbeing of employees as well as the business itself.
To learn more on Business Protection, contact Steve at Steve.Settle@sjpp.asia or +65 9167 9634 to arrange a consultation and safeguard yours and your family’s financial future.
1 Business Protection: State of the Nation’s SMEs Report 2021, Legal & General, December 2021 (Based on a survey sample size of more than 500 small businesses)
The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives. Members of the St. James’s Place Partnership in Singapore represent St. James’s Place (Singapore) Private Limited, which is part of the St. James’s Place Wealth Management Group,and it is regulated by the Monetary Authority of Singapore and is a member of the Investment Management Association of Singapore and Association of Financial Advisers (Singapore). Company Registration No. 200406398R. Capital Markets Services Licence No. CMS100851. St. James’s Place Wealth Management Group Ltd Registered Office: St. James’s Place House, 1 Tetbury Road, Cirencester, Gloucestershire, GL7 1FP, United Kingdom. Registered in England Number 02627518.