UK tech companies have seen explosive growth in the past 10 years, with 2017 being the strongest year yet for the UK tech industry. Silicon Valley investors more than doubled their funding for UK tech companies in 2017 and start-ups saw an impressive cut. In the first 9 months of 2017, British start-ups received as much as £884.8 million from San Francisco based venture capital backers. This is more than double what they received for the entire year of 2016*.
Growing deal volumes are also driving a pick-up in Key Man Insurance as many dealmakers now regard it as a prerequisite to doing business. This means that for a swathe of smaller companies, such cover can hold the key to the next stage of expansion.
Even so, the death or serious illness of a key staff member remains one of the most common causes of demise for smaller UK businesses. For many, it can be like losing a wheel on the motorway.
This is because the real value in any small business is in the people who run it – the ones with the vision, direction and expertise to make it a successful enterprise. Losing one key person in the company could mean losing a company’s identity.
Business Protection Expert at Drewberry
We’re frequently called in by private equity or venture capital investors to tackle such risks. While some require sufficient Key Person cover to protect their investment, others will also want to see their projected return covered, too. Fortunately, this can be done for any firm, even those that have yet to make a profit or are currently losing money.
A good Key Man Insurance package can also protect against the risks of:
But finding the right level of cover for the right people can be more art than science. This makes finding an experienced adviser who can guide you through the process a must.
Calibrating the right level of Key Person cover requires a dialogue between a company and its investors – something an adviser is well positioned to mediate.
Given the complexity and leg-work involved, having an experienced adviser in your corner can make all the difference, especially when financing requirements introduce tight deadlines. Meanwhile, the cover that comes as a result could one day be the difference between whether a company sinks or swims.
With a broad range of insurers offering cover, there’s little uniformity of approach. Each has its own proposition and its own preferred formulas, which makes comparing premiums on a like-for-like basis fraught.
Because Key Man insurance rests on there being an ‘insurable interest’, the level of cover must reflect the profits at risk. Generally, insurers set limits based either on a firm’s profits or the employee/director’s income. A broad rule of thumb is that key people should be covered by up to twice their contribution to gross profits or five times their contribution to net profits (although no insurer is likely to offer Key Person cover more than 10 times an individual’s salary).
The tax treatment of a Key Person Insurance policy also needs to be factored in when calculating the level you need. If the benefits are liable to tax, the level of cover will need to be grossed up by a company’s corporation tax rate.
If this isn’t done, the sum assured might be too small to make a difference when a key person is suddenly out of the picture.
Business Protection Expert at Drewberry
For the leaders of most small companies, the job of setting up Key Person Insurance is far too much to take on while running a successful company. This is why finding an experienced adviser pays dividends – especially as there’s no fee attached for the advice they provide.
An adviser can help put worthwhile commercial values to the contributions made by different staff members. They can take on all the legwork required for a watertight application and assemble valuable business data that’s often appreciated by investors.
They can search the market for the best combination of premiums and policy terms and monitor a policy throughout its lifetime making sure that the benefits continue to rise in line with the company’s profit – something especially pertinent to the UK’s armada of fast-growing smaller companies.
If you would like any help arranging keyman insurance then as independent advisers with a specialist business protection team Drewberry are ideally positioned to assist, just contact us on 02084327333.
Director at Drewberry
I had the pleasure of dealing with Jake Mills in organising my insurance. Jake was fantastic to deal with — his patience and understanding really helped.