What should a small business do when the boss drops dead?

Key person insurance can help small businesses cope with the loss of crucial staff.

Bodyguards protecting businessman on city street © Alamy

You may not need bodyguards, but consider insuring the boss
(Image credit: Bodyguards protecting businessman on city street © Alamy)

What would happen to your business if its owner or a senior member of staff died or fell critically ill? A survey by Legal & General suggests that 26% of small businessesin Britain would have toclose in these circumstances. The insurer reckons 15% of small businesses that have experienced these problems have already shut up shop.

No wonder. In smaller businesses, knowledge, experience and expertise are often concentrated in the hands of a small number of key individuals. If one of those individuals is no longer around, the result could easily be a dramatic loss of customers or a collapse in efficiency. As sales slump and costs rise, those left running the business may not have the know-how to save it, or the time to acquire that knowledge.

Insurance could be part of the answer, particularly for businesses where there is scope to carry on if managers can just buy themselves a bit of time. Key person insurance is one possibility. This cover pays out in the event that the business loses a crucial figure named in the policy, typically the founder, the chief executive, or another vital executive. The insurance will usually cover profits lost or debts incurred as a result. It will also pay some of the expense of hiring someone to replace the executive.

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Consider shareholder protection insurance too. If a director of your business dies, the remaining shareholders may want to buy their stake in the company from their heirs. This insurance provides a lump sum with which to do that.

Covering specific business loans is another option. If the founder of your business dies with loans taken out on behalf of the company still outstanding, the lender will seek to recover its money. For firms without the cash to repay such debts, insurance can help.

Make a succession plan

If you can build a workforce where people steadily take on more responsibility and augment their expertise, it should be easier for employees to cope with a disaster.

A formal succession plan, meanwhile, sets out how the company will manage as staff move on in the normal run of events, as well as if a key leader is suddenly unavailable. Planning ahead in this way and insuring against especially severe risks should be a priority for any firm and will often pay dividends even if disaster never strikes.

David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.