Staying on top of the value of your clients’ business is vital for advisers selling business protection because getting these valuations wrong can lead to reputational and legal challenges for these firms.
This is according to panellists Bizval head of UK and Europe Jim McLaughlin and CEO Graham Stephen who were responding to a question raised by Health & Protection during a session marking Business Protection Week
Asked specifically about what impact not valuing a business properly would have on advisers selling business protection, McLaughlin explained that a key challenge would come if there was more than one shareholder in a new acquisition and it is was acquired for an incorrect price.
“That could be challengeable in the future with regards to what the compensation might be in terms of paying it out,” McLaughlin said.
“But in that scenario, the business has to be continually revalued anyway with regards to what you’re insuring for.”
Shareholder agreements
McLaughlin added that businesses need to ensure they are paying the right amount ahead of acquisition.
“The valuation should be done before you acquire the business to ensure that you are paying the right amount,” he continued.
“But assuming it wasn’t, then the insured element needs to be dealt within the shareholder agreement if there’s more than one shareholder with regards to what the compensation would be for distribution or rebuying of a shareholder’s assets within it.
“The insurance element should relate to what the business actually is worth rather than what they paid for it.”
Risk of overvaluation
Picking up the point, Stephen maintained that advisers also face the risk of overvaluing a business.
“If it’s overvalued, you may actually have a challenge from an underwriting point of view, even if you have been paying the premiums, if the inherent value isn’t there, that creates a potential risk down the line,” Stephen said.
“And the sad reality is that at that point, it might be five years down the line, it’s too late, that stuff’s been forgotten about.
“There’s legal but also reputational risk that comes with it if you get it wrong.”
