Question: I am in the process of starting a small health and fitness business in Dubai that has been set up on the basis of one of my friend's talents and connections in the industry. He will be working as an employee of the new company but I am worried that if anything were to happen to him then I will be in trouble. Is there anything I can do to protect the business financially in this scenario?
Answer: Regardless of what anyone else tells you, businesses are established to make profits and these profits come from assets and the most valuable asset of any business is its people. The most important asset you have by the sounds of your question is the talents and contacts of your friend and as you rightly point out it would be wise to protect yourself and your business in the unfortunate event that he passes away.
Many businesses run on the talents of key people and in recognition of this they are known as ‘key men' — in short these are the specialists in the company on whom the profitability of the business depends, and if they die this will not only incur costs in terms of replacement but also in terms of potential loss of business.
In the case of a health and fitness club the reputation of the whole brand could be negatively affected in the event of such a death, which could translate in to a loss of connections with suppliers, customers, buyers and clients.
As a result you must think about the consequences if your key man dies unexpectedly or is acutely disabled and there is no ready successor.
Initially there would be uncertainty because of the need to replace the key man quickly, followed by a period of re-adjustment during which the company will struggle on with a less-able understudy.
There will also be expenses involved in finding and training a new key man including headhunting fees and a remuneration package that is at least as good as the original.
Worst case scenario
In the worst case scenario the situation could lead to the collapse of the business as a result of a "wait and see" syndrome, where clients refuse to continue their commitment to the business until the loss is sorted out.
In such a situation competitors will jump on the opportunity to attract customers away.
Of course, not all of these disasters are likely to strike a business on the death of a key man but if even only one or two of them apply then there could be a considerable loss of profit.
In the most extreme case, the loss of revenue coupled with a clampdown on credit facilities may result in the business being forced into liquidation.
The best move is to take out a life insurance policy on your friend, which the company pays for, so that the necessary money is available to ensure you are financially able to deal with the above problems.
All the proceeds of the policy would go to the company and would be sufficient to meet the expected losses resulting from the key man's death.
Discussing such a policy with an independent financial adviser is important with key man insurance to ensure that the right amount of life cover is put in place using the most suitable policy.
The writer is Chartered Insurance Broker and Commercial Director at Nexus Insurance Brokers L.L.C. Opinion expressed here is the writer's own and do not necessarli reflect the views of Gulf News. If you have any questions, please email to advice@gulfnews.com.
