No one doubts the importance of small to medium sized enterprises (SMEs) to the financial wellbeing of the UK. They are the engine-room of the economy. So what would you do without your key workers and directors?

Small to medium sized enterprises (SMEs) are crucial to the financial wellbeing of the nation – that’s one of the few things on which politicians of all parties agree. Indeed, a flourishing SME sector is seen by commentators from across the spectrum as being key to the revival of the UK economy as a whole.

These firms – employing up to 250 people, perhaps turning over no more than £26 million – account for 99 per cent of the UK’s near five million businesses. None may be classed as a major employer outside its immediate community, but collectively, looked at on a national scale, they are where we work, they are what we do.

So what would we do without them?

The question needs to be asked because, by their very size and nature, SMEs tend to be heavily reliant on the people who run them. Big organisations insist on broad management structures and devote time and resource to succession planning and the creation of mobile hierarchies. That is a luxury SMEs cannot afford. And this leaves them exposed to the problem of what to do if a key individual dies or becomes incapacitated due to illness or injury.

Fair shares for all

The main potential problem is that, if a senior working shareholder dies, their shares might pass to their next of kin. Fair enough, you might think – but what if that person has no interest in the company, or has no expertise in running it?

Many businesses will be structured in such a way, via their articles of association, that surviving shareholders have the right to buy the shares of a deceased partner or co-director. But this legal framework is only worthwhile if the survivors have the necessary cash. No cash, and they cannot exercise their option to buy.

The solution to this ticklish problem is life assurance – sometimes referred to, in this context, as directors’ or partners’ share protection insurance.

The key to success

Each firm will need expert advice on how to structure its insurance arrangements, but the basic solution is to insure each main shareholder’s life, with the company as the beneficiary of the policy. Then, if the worst happens, the proceeds of the policy will become available to buy the shares from the deceased person’s estate.

This means the remaining shareholders can retain control of the company’s equity while at the same time paying a full and fair price to the beneficiaries of the deceased.Insurance can also be arranged to pay out if a named individual is permanently incapacitated or struck down by a terminal illness.

If you are helping to run one of the firms that make up the backbone of UK plc, you owe it to yourself, your family and your colleagues to consider the role of insurance in securing the long-term financial health of your business.

It is important to take professional advice before making any decision relating to your personal finances.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. THE VALUE OF INVESTMENTS IS NOT GUARANTEED AND WILL FLUCTUATE. YOU MAY GET BACK LESS THAN YOU INVEST. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.