DEBONAIR: Protection against any eventuality is important, yet many SMEs lack crucial key-man insurance and succession planning. By Tarun Khanna.

Time and again we have witnessed the tragic consequences business owners face when running a company without the right protection in place from severe financial repercussions to bankruptcy and business closure. And in the Gulf, where family-owned companies and small-to-medium enterprises (SMEs) account for a substantial portion of businesses and make a significant contribution to the economy, such planning and protection is crucial.

In the UAE alone, SMEs represent more than 94 per cent of businesses, account for 86 per cent of the private sector workforce, and contribute more than 60 per cent to the GDP.

Yet despite the clear need for business owners to adopt a robust and solid succession plan that could potentially save the company from a devastating financial blow, little awareness, coupled with the transient nature of many businesses, is leaving many companies in the UAE unprotected. A recent survey by Nexus Group found that 92 per cent of Dubai-based SMEs lack a solid succession or contingency plan, which can lead to a number of issues, ranging from family-related complications, partnership issues and the inability to pay employees’ salaries, to the prevention of business continuation and expansion.

The survey showed that most business owners, and even CEOs of large organisations, tend to place significant emphasis on growth and expansion, while failing to recognise the major impact of losing key personnel in the business. And although it certainly is important for SMEs to grow, the lack of a comprehensive succession plan can lead to the deterioration of businesses and the personal relationships of those involved.

Drawing up a succession plan and reviewing it periodically will not only safeguard the business and its employees, but also protect the wellbeing of family members and dependents of business owners.

Questions that may arise during the planning process include who will adopt the role of the affected individual, what role other family members will play, how the assets of the business will be allocated, what expansion routes to take, and an alternative solution should a family member decide against an assigned role.

If a business owner does not have a succession plan, what will often happen is the business will suddenly fall into the hands of an investor or relative who does not necessarily have the skill set or perhaps a genuine interest in running the company.

This is where tailored corporate-owned policies, such as key-man or partnership insurance, can make a difference. Such policies protect the interests of a business by providing an organisation the financial compensation it requires to continue operating should an unfortunate event happen, such as a key person’s death or permanent disability.

In this case, such a policy can protect the company profits by compensating the business should it lose income and revenue caused by that person’s absence. It can cover the costs resulting from loss of revenue, loss of intellectual capital, downtime and the training and recruitment fees associated with replacing that person.

While there is no hard and fast formula for calculating how much a key person is worth, insurance companies will typically look at a number of factors, including shareholder agreements, company valuations, contributions to revenue, value of intellectual capital and cost of replacement. A well-designed succession plan enables business owners to achieve their personal and business goals, ensures the business’ survival and growth, and maximises company value in both good times and bad.

The writer is CEO of Nexus Group, a leading independent financial advisor.