The value of business insurance

Question: I have recently established a business in Dubai with other business partners. Do we need to insure our individual business interests in the company?

Answer: There are many considerations when establishing a new business and one area that is commonly overlooked is business assurance.

However, protecting a new business in the event of the death or diagnosis of a critical illness of one of the partners is a very important aspect of forming a new company.

Without appropriate and adequate protection the business interest of the deceased could potentially pass to unsuitable business associates, and the business partners will want to "buy out" the deceased business interest. The key to making this happen is having access to capital required.

On the death or diagnosis of a critical illness of a partner, the business will face a number of issues:

nA moral obligation to care for the deceased's dependents by purchasing the inherited business interests. However, this could put your newly established business under considerable strain at a time when finances are probably stretched.

nYou are likely to want to retain control of the company by buying back your deceased colleague's business interest, but this is unlikely to be an easy task.

nMoney set aside for other purposes may have to be used to buy the deceased's shareholding. If the necessary funds are not immediately available, borrowing might be an option, although it would place an extra financial strain on the remaining directors.

nThe business interest could be left in the hands of the deceased's family, but the family may not be able to make a worthwhile contribution to the future success of the business and may prefer to take a cash sum.

nWithout a prior agreement it may be difficult to place a value on the business that all parties agree is a fair price.

nIf the deceased's family finds a buyer from elsewhere, the business interest could end up in the hands of someone who does not have the same objectives and business interests as the other directors.

Similarly, the business partner's dependents will also have their own issues:

nThe family would almost certainly prefer a cash sum to the business interest as it would provide greater financial security.

nThe family of the deceased may have no interest in, or aptitude for, the business.

nFor most dependents the only course of action would be to sell the business interest. However, there may be no ready market for the shares, and probably little chance of obtaining a fair price.

nConsidering all of the above, business protection insurance cover can be a peace of mind alternative which allows you to concentrate on the other areas of the business. If the circumstances arose where business protection was required, funds are made available to buy the business interest from the partner or his estate, so that the business interest can be turned into cash.

By establishing a business protection arrangement you will be able to ensure that the business would continue uninterrupted and at the same time protect the deceased member's family.

It is important to seek independent financial advice to establish business protection arrangements as there are a number of key considerations before moving forward with a policy.

- The writer is CII Chartered Financial Planner at Nexus Insurance Brokers, one of the region's leading financial advisor. The opiniuon expressed here is the author's own and does not necessarily reflect the views of Gulf News.