Jason Waldron - Protection specialist

Jack and the Beanstalk, a lesson in succession planning

The importance of family businesses in the Middle East and their contribution to the regional economy is undeniable. Not only do they account for almost 90 percent of private sector businesses in the UAE, they are responsible for greater than 70 percent of employment in the GCC. Given their significance to the region, it is alarming to note that according to a survey by KPMG, only 38 percent of family businesses in the UAE have developed a succession plan for their CEO. Jason Waldron, Key Relationships Manager at Zurich Middle East breaks down the importance of protecting your business from key person risk in this insightful Zurich IQ blog article.

Why is succession planning important?

Many businesses fail, not because they are unsuccessful as businesses, but because of a lack of emergency funds. If a business owner dies, becomes incapacitated through illness or accident, or experiences personal monetary problems, the business tends to pay the price.

I was first introduced to the concept of key person insurance, shareholder protection and succession planning not when I joined an insurance company, but when I read the story of Jack and the Beanstalk. This beloved fairy tale is really a story of poor succession planning.

A poor widow, with a troubled farming business and a son named Jack is forced to sell her one prized asset in order to survive. In exchange for the asset, a cow, Jack secures 5 magic beans that grows into a magical beanstalk leading to a giant’s castle in the sky. After Jack climbs the beanstalk, he sneaks into the castle and takes a hen that lays golden eggs and a harp that plays wonderful music on its own accord. On his path back to the farm, the giant chases Jack down the beanstalk eager to recover his possessions. The only thing preventing Jack and his mother from being eaten is an insurance policy, an axe that is used to chop down the beanstalk and bring down the giant. They all live happy ever after with a lifetime of golden eggs and wonderful music.

Jack is a second generation business owner with insufficient funds to continue the business on the death of his father. His mother has insufficient skills, knowledge or experience to run the business on the death of her husband and has inherited shares in a company that are worthless in her hands. Is it better to keep the cash cow, rather than be forced to sell it for beans?

So what is key person insurance?

Often the business owner is the money making machine within the business, and much like a machine that generates money it is prudent to insure it against loss or damage. Regionally, 67% of single owned businesses would be unable to survive on the death or incapacity of the business owner.

As a business owner, you are probably now asking yourself “Do I need succession planning?” I implore you to ask yourself the following questions:

- What will happen to my business if I pass away or become incapacitated through illness or injury?
- Who will own the company shares when I am gone?
- Is the company worth more or less without me in it?
- How can I protect the inherited value of my business once I am gone?
- Have a planned for ownership as well as management succession?

Some family businesses may have an individual who is next in line for business ownership. This person may or may not have the skills and the desire to take on this all important role. The real challenge however will lie in transitioning the next generation of leadership with minimum disruption and cost to the business.

While approximately 88% of family businesses indicate that succession planning is important to their business, only 38% have actually developed a plan to succeed their CEO. A business cannot just assume risk, you as a business owner must actively manage it. Take the time, speak to an expert, understand and protect your business against certain risks that will otherwise destroy the livelihood on which your family relies.

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