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

Bodyguards protecting businessman on city street © Alamy
You may not need bodyguards, but consider insuring the boss

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

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 businesses in Britain would have to close 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.

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

In reality, however, no amount of insurance will totally protect your business from the loss of a key person. So even very small businesses need to consider succession planning and career progression for employees.

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.