One meaning of the word ‘key’ in the English language is ‘essential, fundamental or crucial’ and emphasises the importance of something. Within the dental practice, there are key professionals who have the knowledge and skills to create and keep the business running successfully. Without them, there is a possibility that it could no longer be sustainable.
Most people would agree that not insuring their physical assets against danger is irresponsible. Property owners insure buildings against theft, fire, flood and storm damage and business owners will take further cover to replace the consequential loss of profits they may incur while waiting for these assets to be replaced. However, it is not unusual for dentists to overlook their most important assets of all – the people whose skills and knowledge are critical to the existence of the business.
Within a dental practice, the expertise and contribution of key people needs to be protected adequately and appropriately to secure the viability of the practice as a whole.
If this vital cover is overlooked then a business can be left in uncertain territory. Many dentists believe that if their loans are covered then they are secure and they can sell the practice if the worst comes to the worst.
Problems arise, however, when surviving partners cannot afford to pay a deceased estate or when they do not want to or find it difficult to sell their practice.
Half and half
Let’s look at an example: Dr Jones and Dr Smith form a partnership and own a dental practice on a 50/50 basis. They decide to take out a practice loan to extend their building and incorporate some new technology. However, a few years later, Dr Jones dies. The practice loan must still be repaid in full but, additionally, Dr Jones’ estate includes half of the value of the practice at its current worth and his executors expect to receive his fair share of the business. Assuming the practice is worth £1 million, the estate will legitimately expect £500,000. Dr Smith may not be able to fund this amount of money and, consequently, the business is in danger of collapse.
Key person assurance is an insurance policy that can be used to compensate a practice for financial losses that would arise from the death or extended incapacity of an important member of the business.
The practice pays the protection and, in the event of death or critical illness, a lump sum is paid by the assurance company to eliminate the financial strain on the surviving business partner. In the case of the partnership described above, the practice would receive the £500,000, enabling the surviving partner, Dr Smith, to pay Dr Jones’ estate and allow him to retain the entire business.
Obviously there are financial implications of the key person assurance, such as the need to pay the premium. However, it is paid by the business not the individual, which means that tax relief is applicable on the premium and the benefit is also paid out tax-free. So, there is really no reason to prevent practice owners from taking out key person assurance. The peace of mind is invaluable and if the worst happens, there are no complications or financial strain on surviving partners, family or estate.
A partnership agreement is also essential when a business is a shared investment. According to the Partnership Act of 1890, if a partnership dissolves then the deceased partner’s share may have to be paid to the estate. This could mean struggling to fund thousands of pounds when one of the profit sources of your practice has been lost.
Similarly, if one of the partners of a business becomes very ill or disabled, the effects can also be destructive. They may need to continue taking a profit from the business when they are unable to practise themselves. Alternatively, they may wish to take early retirement or be bought out. A partnership agreement should document how these circumstances can be resolved for both partners, as well as the business.
The key is often used as a symbol of security and throughout history it has also been used to represent the ability to gain access or open up opportunities.
Don’t overlook your vital key people, who allow you to access indispensible skills and bring value and security to your practice. They need to be protected from unforeseen circumstances to ensure a safe and fruitful future for everyone involved.
Richard T Lishman is managing director of Money4dentists, a firm of specialist independent financial advisers that helps dentists across the UK manage their money and achieve their financial and lifestyle goals.