108 | Share Protection

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  • Richard Kateley, Head of Specialist Protection, Legal & General
  • Stuart Halliwell, Market Development Manager, Legal & General

Learning outcomes:

  1. The different types of business structure available in the UK
  2. How to set up different types of share protection arrangements
  3. The supporting agreements for share protection and how these differ
  4. Premium equalization and how this works
  5. The importance of regularly reviewing the cover in place against the changing value of the business
  6. The demographics of UK businesses and how share protection fit into their context
  7. The implications of not putting share protection in place

State of nation report

rough guide to business protection

L&G business protection website


Learning outcomes: 1. The different types of business structure available in the UK 2. How to set up different types of share protection arrangements 4. The supporting agreements for share protection and how these differ 5. Premium equalization and how this works 6. The importance of regularly reviewing the cover in place against the changing value of the business 7. The demographics of UK businesses and how share protection fit into their context 8. The implications of not putting share protection in place PRESENTER: How to protect the ownership of a business. That’s the subject of this Akademia learning module. And running us through the content are our two tutors, both from Legal & General, the Head of Specialist Protection, Richard Kateley, and Market Development manager, Stewart Halliwell. So let’s have a closer look at what we’re going to be covering today. We begin in the studio with Richard Kateley looking at share protection and getting a definition of it. We then move on to awareness levels of share protection, the pitfalls of buying out a business owner’s shareholding and family involvement in a business. We then go across to Stewart Halliwell. He considers the different types of business structure available in the UK, how to set up different types of share protection arrangements, company share buyback arrangements, cross option agreements. He looks at premium equalisation and how that works, reviewing cover in line with changing value of the business. And then it’s back to the studio for the concluding part of this session on the importance of reviewing a company’s articles of association, targeting the right businesses with share protection, and how advisers can build up knowledge of the product. So I began by asking Richard Kateley for a working definition of share protection. RICHARD KATELEY: Well as you can imagine the loss of a business owner could be very destabilising to a business. It can quickly lead to financial difficulties, not only for the business itself but also for the family of the business owner. So simply put share protection allows the remaining partners, directors and/or members to remain in control of the business. It gives the family the option to sell their shares for a fair value following the death of a business owner. Without share protection in place the company may not have the resources to buy the shares from the family. The owner’s shares could then pass to the family, and the surviving business owners could therefore lose control of a proportion of the business, or in some circumstances the entire business. PRESENTER: But is that a bad thing if the family retains control of those shares? RICHARD KATELEY: It might be depending on the ability and the knowledge within the family. If this is happening to a family who are already involved in the business, then it could actually be a good thing. But if you’re having the situation where the family aren’t involved in the business, they have no experience in it, it may not be what the remaining directors would want. They could decide to sell the shares to a competitor, which again might not be suitable for the other directors. It’s all a bit uncertain. A share protection policy can help avoid these issues by providing the funds to purchase the shares, and also provide a suitable mechanism for the existing shareholders to retain ownership of the business. PRESENTER: So let’s assume the shareholder dies, there’s shareholder protection in place. What happens next? RICHARD KATELEY: So in the event of a claim the surviving business owners will have the funds available to purchase the affected individual’s share of the business for a pre-agreed fair value via a life policy. This means that the remaining business owners can retain full control of the business, whilst being comfortable that the deceased’s beneficiaries have been treated fairly financially. All we’re trying to do here is to make sure that the company remains in the right hands. The way I like to think about it is we are creating a guaranteed marketplace for these shares. So the company can buy the shares and retain control of the business. The beneficiaries get fair value for the shares and the company in an easy pre-agreed process with agreed buyers and sellers. PRESENTER: You’ve just published the fifth edition of your state of the nation when it comes to protection and SMEs. Are they aware of shareholder protection? RICHARD KATELEY: In a word I’d have to say no. The research highlighted a level of uncertainty I guess when it comes to shareholder protection, and what would happen if a shareholder died. There are some real concerns in the findings for me. I mean to start with over half, 51%, of the business owners either had no will or made no mention or reference to their shares in their will. Now on the face of it you might say well that’s fine, the shares will go to their wives or husbands. But consider what might happen if they’re not married or if both of them died at the same time. In this event the shares could be tied up with probate for months. What if this related to a controlling share of the business? This could lead to all sorts of issues for the business and the family. You could end up with the business being paralysed because no one in the business or the family actually have a majority until probate is resolved. PRESENTER: So what do you think would happen to the shares if they were to die? RICHARD KATELEY: Well just over a quarter of the respondents assumed that remaining shareholders would buy their shares in the business, which in most cases is probably the preferred solution. It does however raise some rather interesting questions. To start with will they be able to fund the purchase? What will the shares be worth at that moment in time? 21% said their partners or beneficiaries would inherit their shares and taken an active role in the business. But actually the question then is can they? You only have the right to do this if you are either a majority shareholder or if you’re invited to do so by the remaining owners. I would have thought they would only do this if you had the skills, aptitude and in some circumstances qualifications to do so. Other responses we received included 16% said they would sell their shares to a third party. Now you’re only likely to be able to do this if you’re talking about majority holding, and therefore what they’re simply saying is they’re going to sell their business. 12% said their beneficiaries would keep the shares and benefit from the income without actually taking an active role in the business. The problem here is that they would become a third party drain on the business, as they’re not actually adding anything to the business while taking funds out of it. The real question for me is have they actually had these discussions amongst themselves? With a few probing questions you can usually see if they’ve actually got a clear idea or not. In the vast majority of cases I would suggest you’ll probably be the first person to have asked this question. You’ll usually find that they have never really considered it in any real detail. Sometimes it’s worth asking the question whether they have a disaster recovery plan to see what’s in it, and if a shareholder’s death is included. If not, asking them if losing a shareholder would be a disaster compared to say the office burning down or machinery breaking down. The usual question is yes it is, but they haven’t actually thought it through. PRESENTER: You state in your survey that just over one in four of those interviewed said that their fellow business owners would buy out their share. But in reality can they do that? RICHARD KATELEY: Well there’s nothing stopping them, so I guess the answer is yes they can. I would suggest perhaps a better question might be how are they going to buy them? This then leads to some interesting questions which can be quite revealing. If they want to retain control of the business and buy the shares, where would this money come from? Secondly, how much would those shares be worth following the death of a shareholder? And finally would this lead to their estate, most likely their families, receiving a fair value for the shares that they’ve worked so hard for? When we ask the question about the funding over half of the people we spoke to said they would fund it from their own personal wealth, which is a nice situation to be in but actually in reality could they? 38% seemed to have thought it through and said they would rely on a life policy, which implies 62% haven’t got one – all great opportunities for an adviser to discuss with the client. One caveat I would add here is that they should always check their articles of association, and if there are any blockers to buying or selling shares this is where they’ll find them. PRESENTER: But surely they could go to the bank for the money. RICHARD KATELEY: Possibly, and indeed 8% from the research said that’s exactly what they would do. You have to consider will the bank want to lend to a company who’s just lost a major shareholder who could have been key to the business? They’re probably more likely to ask whether they could service their existing debts rather than give them more. An interest new option actually in the survey came out this time was that they would use their pension to buy the shares. Now I’m not expert in pensions and purchasing of company shares, but again a great opportunity for an adviser to get involved and to give some good advice. In the vast majority of cases there is no doubt that the follow shareholders buying the shares is the best option for everybody involved. But without these plans in place that might not be an option to them. PRESENTER: And what kind of problems could be faced by shareholders if there’s not appropriate shareholder protection in place, what happens? RICHARD KATELEY: Well in many cases both parties, the surviving business owners and the family of the deceased, can be disadvantaged, either by losing out financially or by losing control, which no one wants. From the perspective of the business, the remaining shareholders may feel a moral obligation to look after the dependents. But this might put significant strain on the business at a time when their finances are already being stretched. There will be additional pressures from the practical perspective, because it would be highly likely that the lost owner would also have been key to the business, and their tasks and responsibilities would need to be carried out by somebody else within the business. The dependents may, not unreasonably I would guess, want the business to pay the highest dividend possible to maximise their income. However, this may be impractical or undesirable for the remaining shareholders who may prefer the profits to be distributed via salary, keep it within the business, or to be used to pay for pension contributions. If the surviving business owners ultimately cannot find the funds to purchase the shares from the estate, they may look elsewhere for the buyer. The shares could end up in the hands of somebody who does not have the same objectives or business interests to the other owners. In the worst case scenario if this was the majority shareholding the shares could end up in the hands of a competitor. PRESENTER: But I guess the problems for families are far more financial. RICHARD KATELEY: Yes, I think that’s a fair assessment. The problems caused not having an arrangement in place for the family can include having no interest or aptitude in the business, making it difficult to replace the deceased even if they could or indeed wanted to. If they’re unable to join the business then it becomes difficult to insist on regular income from the business. This is especially true if the deceased had a minority shareholding. If the surviving business owners are unable to fund the purchase of the shares, then the only cause of action really for the estate would be to try and sell the shares to a third party. However in most cases there will be no ready market for these shares, and therefore little chance of getting a fair value. Let’s face it we’re not usually talking here about registered shares that you can trade on the stock market. A minority shareholding in a private limited company generally is worth very little to anybody except the other shareholders. A limited liability partnership or a partnership would have the same problem. PRESENTER: So from what you’re saying it’s not great for either party really. RICHARD KATELEY: Not really, and of course you have to remember that this uncertainty is going on while the dependents, like the family, are trying to get over the loss of a loved one, and the business is trying to deal with the loss of an owner who in all likelihood was a key person to the business. This is all magnified of course if you’re talking about a family business where the dead shareholder could have been mum, dad or Uncle John. Simply a bit of financial planning and having the correct protection in place can remove all these uncertainties for everybody concerned. PRESENTER: So this is really about creating a guaranteed marketplace. RICHARD KATELEY: Exactly, creating that guaranteed market for the shares so the company can buy the shares and retain control of the business. The beneficiaries can get fair value for their shares in the company. And it’s all done in a pre-agreed process with agreed buyers and sellers, makes it nice and simple. PRESENTER: I guess many shareholders though assume that their family could just go and work for the business, or else they could maintain their shares and there’s a stream of dividends coming off them. RICHARD KATELEY: Yes you’re right, but it could all depend on the shareholding, and what if anything is in their articles of association, or if they have one their shareholders agreement, or partnership agreement in the case of a partnership. A majority shareholder can appoint themselves as director as effectively they now run and control the business, and they can go and work there. But would they have the ability to do the role? Would they actually want to do this? And if they did are the other shareholders happy for them to do so? Of course as the majority shareholder the other shareholders may not have a choice. They could just take the dividend income, add nothing to the business, but as the majority shareholder they would have to have some involvement within the business. PRESENTER: So what’s the situation for a minority shareholder then? RICHARD KATELEY: Well for a minority shareholder they’re in a much weaker position. They would be unlikely to have an automatic right to a role within the business. They could just draw a dividend income due to them, but this would only be paid if the other shareholders declared an income. As I said before many small businesses, they’re reliant on individuals that are involved being active within the business. And so this, you could then become an unwanted drain to their resources. PRESENTER: And so stop the dividends. RICHARD KATELEY: Exactly right, in which case they could end up with shares with very little value because they can’t sell them, and now they have no income coming from them either, so not a really great situation for them. PRESENTER: But if the remaining shareholders did want to buy that shareholding out, couldn’t they just go to the bank and borrow the money? Why might that not be a good idea? RICHARD KATELEY: Indeed they could. However I would suggest that probably the last person they might want to approach in this situation is their bank. They may have had a great relationship with the bank now, but a shareholder has just died in the business, would the bank still have the same view of that business in the future? It’s worth mentioning that if the business had to go to their bank to look for investments to fund for the share purchase following the death of a business owner, the bank may have some justifiable concerns. Firstly they will understand that it is highly likely that the deceased owner was a key person in the business, and the performance of the business may now suffer as a consequence of their death. They may now actually be more concerned with the business’ ability to meet their existing commercial debts rather than looking to support with additional funding. We often hear business owners say to us that they have a great relationship with the bank. Well you may today, but they are a commercial concern like any other business, and they can’t allow sentiment to get in the way of commerciality. PRESENTER: Richard, thank you for that. Well there are lots of threats and opportunities there when it comes to shareholder protection. But to discuss in a little bit more detail some of the strategies for putting that protection in place let’s catch up now with Stuart Halliwell, one of the experts at Legal & General in this area. Here’s what he had to say. STUART HALLIWELL: When we’re looking at how we structure share and partnership protection arrangements, we are obviously only concerned with partnerships, limited liability partnerships and of course limited companies. So it’s worth reminding ourselves how these businesses are structured. A partnership is the relationship existing between persons carrying on a business in common. Partnerships are considered separate entities for accounting purposes, but not separate legal entities unless they are Scottish partnerships. This means that like sole traders partners can be held personally accountable for any legal or financial commitments the business has. Joint and several liability means that one partner could also be held accountable for the relevant misdeeds of another. Limited liability partnerships, known as LLPs, have existed in the UK since April 2001. They provide owners with a trading vehicle which has a distinct legal identity. The other main difference between an LLP and a partnership is that LLPs have no joint and several liability. This means that an individual member cannot be held responsible for misdeeds carried out by other members in the course of the business of the LLP. As the LLP has a distinct legal identity to that of its members, it can own insurance policies in its own right. Finally a limited company is a type of business that has a separate legal identity to its owners who are known as shareholders. It is responsible in its own right for everything it does, and its finances are separate to the shareholders’ personal finances. Any profit it makes is owned by the company after it has paid corporation tax, and the company can then distribute its profits. In common with LLPs a limited company can own insurance policies in its own right. There are a number of different ways that the ownership of a business can be protected, and depending on how this is structured it will affect how the policies are written, so let’s have a look at the most common situations. Automatic accrual is a form of ownership protection that is most often used by partnerships. Under this method shareholders or partners would simply leave their share of the business to the other business owners. This could be done via their personal wills or through the completion of an automatic accrual agreement. This agreement could also be included in their partnership agreement, or shareholders agreement and articles of association in the case of a limited company. This method means that the control of the company remains with the surviving owners; however, there is no obvious compensation for the family of the deceased as they will no longer inherit the deceased’s share. To protect the family and dependents we simply need to ensure that each of the shareholders or partners takes out an own life policy to the value of their shares in the business for the benefit of their family or dependents. This simple method of protection is sometimes used by vocational firms, such as accountants or dentists, where only someone suitably qualified should hold an interest in the business, and therefore leaving it to a member of the family may not be appropriate. Next, we have company share buyback. This method of protection may be suitable for limited companies. On the face of it this method looks quite simple, but actually it’s quite complicated when you get into the details. It allows the company to purchase its own shares upon the death of a shareholder. So the estate receives the value of the shares and the other shareholders retain the business. To fund this arrangement the company takes out a policy on a life of another basis on the life of each shareholder. And they also put in place a share purchase agreement. Should a shareholder then die, the company through the agreement would purchase the shares. Once they have been purchased they will normally be cancelled. The effect of this is to increase the shareholding of the remaining shareholders in proportion to their previous shareholdings. As I said this method seems a very straightforward solution; however there are a number of issues that advisers and business owners need to be aware of in respect of this arrangement. Here are just a few of the more important ones. Firstly the company may not currently be permitted to purchase its own shares. Therefore the company may need to review their articles of association and make the appropriate changes before the policies are affected and the agreement entered into. Secondly, under current tax rules, the company would not receive corporation tax relief on the payment of the policy premiums. And any payment of any proceeds would be treated as a trading receipt by the company for corporation tax purposes. Then the actual purchase of the shares must be funded firstly from distributable profits, or proceeds of a fresh issue of shares made for the purpose of financing the purpose. But once exhausted may come from capital. The proceeds of the policy would then replace the distributable profits of capital. There must be a contract to buy back the shares, the terms of which must be approved in advance of the purchase either by an ordinary resolution, or if the purchase is to be funded by capital by a special resolution. Finally it is also worth noting that where shares are re-purchased by a company there is a distribution by the company, to the extent that the purchase price exceeding the amount originally subscribed for the shares. This distribution will usually be subject to income tax. So as you can see there are certain issues that need to be considered when putting a company share buyback arrangement in place. These may make the process more complicated than it first appears, and thus not as suitable for the business. Let’s look at a more common share protection arrangement. The most common form of share protection that we come across involves the use of an own life policy written under trust for the other business owners, and a cross option agreement. This method can be used by limited companies and all forms of partnerships. The majority of business ownership protection is arranged in this way. Share protection has two objectives. Firstly it provides money that should one of the business owners die, the surviving business owners will be able to afford to exercise an option to buy the deceased’s interests from his or her estate. As with other forms of business protection, provision can also be made if a shareholder suffers a specified critical illness. The second objective of the arrangement is to ensure that the deceased’s estate gets a pre-agreed fair value for their shares in the business in a tax efficient manner. The first step is to arrange for each business owner to take out an own life policy written under trust for the benefit of the other business owners. Where there are a small number of owners, ideally just two, it is possible to set up the policies under a life of another arrangement, which can be simpler to do as there is no requirement for a trust; however it lacks the flexibility to deal with changes in business ownership at a later date. The life assurance policy provides the funds to purchase any shares. However, we then need a legal framework to enable the sale and purchase of those shares. The most common is a cross-option agreement, or also referred to as a double-option agreement. This provides a mechanism for using the proceeds from the life assurance policy to purchase the deceased’s share of the business from his or her estate. The cross-option agreement provides the surviving owners of the business with the option to purchase the deceased’s share from the estate. It also provides the estate with the option to sell their shares. If either party chooses to exercise their option, then the other must comply. The agreement should also specify a timescale for the option to be exercised, normally within three to six months. Where critical illness has been included a single option agreement is also included, giving the business owner who has suffered the illness the option to sell their share of the business. The other business owners have no option to force the sale. The wording of the single option is usually included within the double option agreement. A cross-option agreement should also include an undertaking to keep sufficient cover in place, unless all shareholders agree otherwise details of how often this cover will be reviewed, and details of what method will be used to value the business. It should also include guidance to deal with a shortfall or a surplus in policy proceeds as compared to the value of the shares. In the past as an alternative to a cross-option agreement, we have seen buy and sell agreements. This agreement provides that the deceased’s beneficiaries must sell their share in the business to the surviving shareholders, and the latter must purchase them. The disadvantage, however, is that the HMRC considers this sort of agreement a binding contract for sale, and business property tax relief is lost, creating a potential inheritance tax liability. Thus the advantage of using a cross-option agreement over a buy and sell agreement is that IHT business property tax relief is retained, making the transaction more tax efficient. It’s also worth noting that although most insurance companies provide specimen cross-option agreements, it is a legal document. And business owners would be well advised to consult a solicitor to have one completed during the process of putting cover in place. So as we can see the purpose of having each business owner take out a life policy on his or her own life under trust for the benefit of the other business owners is to ensure that the policy proceeds passed to the appropriate people, no other party can have access to the funds. The proceeds are available in a timely manner. The proceeds are received tax free, and the cross-option agreement then ensures that these two properties, the shares and the proceeds of the policy, are exchanged in an efficient manner. The major disadvantage with this method of arranging the protection in this manner is that one director could pay much higher premiums than his or her colleagues. For instance if he or she is older or has health problems that causes a premium loading, or if they own different proportions of the business. This can lead to the business owners having to pay unfair levels of premium. However, the principle behind premium equalisation is that each individual should pay a commercial amount relative to the benefit that they or their family is likely to receive. Failure to equalise the premiums where plans have been set up as an own life under a business trust can mean that inheritance tax becomes a factor. If the arrangement is not commercial, any individuals paying more than their fair share of the premiums can be seen as making gifts. Consequently, any difference in premiums paid caused by the difference in age or the size of stakes in the business could be deemed to be gifts leading to the creation of an inheritance tax liability. If the business owners are paying the premiums out of net income, then their accountant would normally arrange for an annual equalisation payment to be made. Alternatively, if the premiums have been paid by the business, then they will be considered part of the individual’s remuneration and taxed as a P11D benefit in kind. In this circumstance the company accountant will simply equalise the P11D benefits. Most providers, including Legal & General, have a calculator that advisers can use to provide their clients or their accountants with a breakdown of the equalised premiums. You can find our premium equalisation calculator on our dedicated business protection website. One of the most important aspects of putting share or partnership protection in place is calculating the right level of cover. As we have already mentioned the main purpose of this whole process is to help ensure that on the death of a shareholder, partner or member, the surviving owners of the business will have sufficient money to purchase their deceased colleague’s share of the business, and that the family is adequately compensated. To ensure that the right level of cover is taken we need to estimate the value of the business. The business owners may have that level of detail, or may need to rely on their company’s accountant for an estimate of the company’s value. It goes without saying that the policies should be reviewed on a regular basis to take account of any changes in the value of the business, or changes to the levels of the individuals’ shareholdings. If for any reason you cannot get a value from the business or their accountant, then Legal & General provide a simple calculator that you can use. The valuation of the business for sum assured purposed based on a multiple of their net profits after tax, plus their overall net assets. In addition this calculator is designed for use with share protection arrangements, and you can input the individuals, their shareholdings, and it will then calculate the split of the sums assured. As with our other calculators you can find this on our business protection website. PRESENTER: Well plenty in there, Richard, and it looks like a cross-option agreement seems a very sensible and straightforward way to deal with a lot of these issues, but what things should advisers just be aware of? RICHARD KATELEY: As Stuart said there, cross option agreement is a legal agreement enabling the buying and selling of shares. And as such we need to ensure that it works in tandem with any existing legal agreements that the company have, such as their articles of association, or if they have one a shareholders or indeed partner share agreement. However many companies don’t review their articles on a regular basis, let alone know where they are. And partnerships are equally as bad with their partnership agreement, if one actually even exists. From our research 60% of the companies we spoke to have not reviewed their articles in the last 12 months, and in fact interesting a third of all partnerships and limited companies have never reviewed their articles since they set up their business. So they’re not really going to know what’s covered in them. Articles can have some very interesting clauses in them, going from not mentioning what should happen to the shares in the event of a death, through to cancelling the shares altogether. If you want more information on this we do run a full course on looking at articles in much more depth. So we can help advisers improve their awareness of this area, which is quite key. PRESENTER: So would working alongside a solicitor be a good idea? RICHARD KATELEY: Without a doubt, it really is beneficial for advisers in this marketplace to have a relationship with a solicitor. They can help with the legal agreements that are put in place. Let’s face it we’re not qualified to give legal advice, and they’re not qualified to give financial advice in most cases, so the two can really work really well hand in glove. You can of course refer the business to the business’ own solicitor, if they have one that is. But as I say there’s no guarantee that they’ll either have one or they’ll be able to look at them and have any knowledge around business protection. Some advisers we talk to have actually negotiated a price with a local firm. They’ve gone out and talked to local firms. They can include a simple review of the company’s articles, legal agreements and cross option agreements to ensure that the business owners have the peace of mind that all these areas are going to work as intended. Not only can this be an added value to your own business, and your services you’re offering a client, it’s also a great way to develop a mutually beneficial relationship. Where not only the solicitors can provide assistance and potentially new work for themselves, they will have an adviser that they can then refer business back to. Of course the ultimate winner here will be the client, because the peace of mind that they will have that all the agreements set up will work correctly and will do exactly what they’re supposed to do. PRESENTER: Well you’re suggesting there’s a big opportunity here, but aren’t there particular types of business where as an adviser you’ve got a higher percentage chance of providing shareholder protection? RICHARD KATELEY: That’s a great question Mark actually, because on the face of it all limited companies and partnerships could benefit from this sort of agreement – some probably more than others. As part of the research, we also looked at the different needs of a company as it grows. In various stages of development the needs for protection will change. And this can give us some useful insight into what companies may be in more need of share protection than others. You can make some assumptions depending on the age of the business you’re going to talk to. So a newish company for example, may not have built up much value in its share. Therefore share protection may not be very relevant to them. At this stage it may be more reliant on just a few key people; however as it becomes more established then the use of loans will become a bigger part of their business. And of course they now have started to create some value in the business, which both may need protecting. Finally as it moves on into a more established position, or towards maturity, then continued ownership of that business and its value will become much more of an important point for consideration, as the owners will be concerned with protecting its value. So the short answer to the question I guess is for share protection the age of the company might be a better indicator than the type of business that we’re looking at. PRESENTER: So knowing what stage of life a company is in in its life cycle is really important. RICHARD KATELEY: Exactly right, it’s a great general rule of thumb, but it does seem to work in most cases. PRESENTER: So why should advisers look at this market? RICHARD KATELEY: Well for me the great thing when we’re talking about protecting businesses is that we’re not just protecting the lives assured and their families like we do with our domestic protection. What we’re looking here is protecting the staff, the investors, the customers, the suppliers, and in fact that anybody that has a financial stake in the business. Business owners quite often feel that they have a parental care responsibility towards their staff, and so by protecting their businesses they’re also protecting their staff’s mortgages and their families. PRESENTER: But isn’t it very time consuming for an adviser to mug up on a new market and the products involved, however attractive that market may be? RICHARD KATELEY: Not really, for me the fundamentals of business protection are no different to our domestic protection. We use for example the same products such as term assurance and critical illness. Business owners are no different really to our domestic clients; they simply have different needs, objectives that need to be considered. At the end of the day with domestic protection we’re trying to protect our clients’ debts, their income, so that they can keep ownership of their houses, pay their bills and keep their lifestyles. With a business all we’re trying to do is to protect their debts, their cashflow, ownership, so that they can keep trading and support their staff and their customers. We are protecting the same things. So our sales process doesn’t really need dramatically to change. It’s just that there’s different things that we need to talk to business owners than our domestic clients. PRESENTER: And what impact is auto-enrolment having on this space, particularly given that it’s really starting to kick in now with SMEs? RICHARD KATELEY: Absolutely, as you say SMEs are now really being affected by auto-enrolment in much greater numbers. And many of them are looking for professional advice to help them. If as a company you’re in this marketplace, then business protection can be an excellent additional sale that you can just discuss with the clients while you’re talking to them about their auto-enrolment scheme. But getting back to your original question, why should advisers get into this marketplace in the first place? I would say that there are really not that many advisers that are seriously in this marketplace, and there’s a huge lack of awareness among business owners about the risks and what solutions we can offer. Providing advisers with, who really want to crack this marketplace with a real great opportunity. PRESENTER: Well let’s say I’m an adviser watching this, I’m interested, I want to get involved in the market, how can Legal & General help? RICHARD KATELEY: Well I would first urge them to get a copy of our state of the nation research that we’ve just released, as it highlights some of the misconceptions and the areas of risk that business owners are probably unaware of. It also clearly exposes the fact that business owners are not going to come and bang down your door and ask for this sort of protection, mainly because they’re simply not aware of the risks. One of the amazing facts in the last report was that 84% of the businesses who had taken out any cover to protect a debt, only did so because they spoke to a financial adviser, and not through any form of self-recognition of the risk. So we need to be proactive in this marketplace, go out and talk to businesses. We’ve also published a client’s guide to business protection in partnership with the people from Rough Guides, which is designed to highlight both the risks and solutions to business owners. Advisers can download this and forward it onto their clients to aid with their client meetings. PRESENTER: How about webinars and workshops? RICHARD KATELEY: I believe this is where we can really offer plenty of support to advisers looking to explore this subject in much more depth, and developing their own knowledge. From learning how to read company accounts to business development sessions, we have workshops available to cover almost every aspect of business protection. And all our sessions are CII approved for CPD purposes. Advisers can get in touch with our dedicated business protection team through their usual Legal & General contact, or via our dedicated website at The website features all the calculators we mentioned earlier, as well as case studies, technical information, sales support material, educational videos, videos with interviews with business owners who have interesting and relevant stories. And of course this video and the others in the series, which are all aimed at increasingly advisers’ knowledge and awareness, allowing them I hope to go and talk with more confidence to their business clients. PRESENTER: We have to leave there. Richard Kateley, thank you. RICHARD KATELEY: Thank you very much. PRESENTER: In order to consider the viewing of this video as structured learning, you must complete the reflective statement. That’s to demonstrate what you’ve learned and its relevance to you. By the end of this session you will be able to understand and to describe the different types of business structure available in the UK; how to set up different types of share protection arrangements; the supporting agreements for share protection, and how these differ; premium equalisation and how it works; the importance of regularly reviewing the cover in place against the changing value of the business; the demographics of UK businesses; and how share protection fits into their context; and the implications of not putting share protection in place. Please complete the reflective statement to validate your CPD.