Presented by NAME TO BE ENTERED TITLE TO BE ENTERED Scottish Provident Presentation title: The cost of unprotected success – the three key questions Business Protection

April 2007£12.75 Co value£500m October 2007£0.85p (shares suspended) Administrators went in in April 08 Carter & Carter Group plc C&C folded year after founder’s crash death Training group Carter & Carter has gone to the wall less than a year after it’s founder was killed in a helicopter crash... ….C&C has struggled to cope since his death Share Price The effect of losing a key person

Business Protection *Research on behalf of Scottish Provident by Omnibus, February 2010 Direction & vision Entrepreneurship Boardroom cohesion What went wrong Creditor Confidence

Business Protection Solicitors Bank Other consequences Solicitors Auditors IFAs Bank Clients Creditors

Business Protection Owner / Managed Business No ‘substitutes bench’ Limited market for shares Image placement of BP image

Business Protection The owner managed business 4 key business functions Address any problems Leadership Financial control Production Sales

Business Protection Frank Technical Director R&D Quality control Buying Projects Contracts Team leader Peter Finance Director Cash flow Credit control Cost control Forecasting Profit testing Loans/Capital tax Co Sec Anne Sales and marketing Connections Product & market Negotiating Team leader Exports Alan Managing Director Vision Direction Leadership Board cohesion Bank confidence Silos – Custom Control Systems Ltd

Business Protection Peter Finance Director Cash flow Credit control Cost control Forecasting Profit testing Loans/Capital tax Co Sec Anne Sales and marketing Connections Product & market Negotiating Team leader Exports Alan Managing Director Vision Direction Leadership Board cohesion Bank confidence Silos – Custom Control Systems Ltd

Business Protection How will they source a replacement? What are the financial consequences? What will happen to the shares? Peter Finance Director Cash flow Credit control Cost control Forecasting Profit testing Loans/Capital tax Co Sec Anne Sales and marketing Connections Product & market Negotiating Team leader Exports Alan Managing Director Vision Direction Leadership Board cohesion Bank confidence Silos – Custom Control Systems Ltd

Business Protection How will they source a replacement? Peter Finance Director Cash flow Credit control Cost control Forecasting Profit testing Loans/Capital tax Co Sec Anne Sales and marketing Connections Product & market Negotiating Team leader Exports Alan Managing Director Vision Direction Leadership Board cohesion Bank confidence Silos – Custom Control Systems Ltd

Business Protection Time3-6 months Head hunter costs£15,000 Share option buy out10,000 Relocation costs20,000 How quickly can they source a replacement?

Business Protection How quickly can they source a replacement? Friends Provident paid £370,000 for Trevor Matthews to move home Matthews received the ‘relocation allowance’ for his move from Edinburgh to Dorking, Surrey. A spokesman for Friends Provident says: ‘Relocation costs are a standard part of most employee contracts where people have to move location for their role.’ ‘It was extremely important for us to be able to secure Trevor Matthews’ appointment to us.’ Money Marketing – 15/09/2009

Business Protection Time Head hunter costs Share option buy out Relocation costs Package –Car lease –Salary / pension –Bonus 3-6 months £15,000 10,000 20,000 £5,000 £40,000 10,000 £100,000 How quickly can they source a replacement?

Business Protection How will they source a replacement? What are the financial consequences? Peter Finance Director Cash flow Credit control Cost control Forecasting Profit testing Loans/Capital tax Co Sec Anne Sales and marketing Connections Product & market Negotiating Team leader Exports Alan Managing Director Vision Direction Leadership Board cohesion Bank confidence The three key questions

Business Protection Will they remain loyal? What happens if quality and service levels fail? What will be the effect on turnover and gross profit? How will the company meet its fixed costs? What are the financial consequences? How do the customers feel today?

Business Protection Contacting key customers? Approaching key staff? Taking to suppliers? What are the financial consequences? What will the... competition be doing today?

Business Protection Director loan accounts may need repaying? Outstanding salary and bonus may need to be paid Dividends now paid to the estate What are the financial consequences? What will the... executors of the estate be doing?

Business Protection Will they reduce or withdraw credit terms? Can they still get creditor insurance? What are the financial consequences? How do the... trade creditors feel today?

Business Protection Attitudes changing in the economic climate? Will, or can the bank fund cash-flow shortfall? Will they call in overdrafts? If they lend, will they require personal security? What are the financial consequences? How does the... bank manager feel today?

Business Protection The vicious circle of doubt Bank Creditors Customers No cash flow Repay loans Replacement Cash flow Be your own banker ££ Cover

Business Protection Summary of needs Replacement costs Director loan account Bank loans & overdraft Contribution to GP £ 100,000 £ 50,000 £ 150,000 £ 450,000 Need 1 Key Person Cash Flow

Business Protection How will they source a replacement? What are the financial consequences? What will happen to the shares? Peter Finance Director Cash flow Credit control Cost control Forecasting Profit testing Loans/Capital tax Co Sec Anne Sales and marketing Connections Product & market Negotiating Team leader Exports Alan Managing Director Vision Direction Leadership Board cohesion Bank confidence The three key questions

Business Protection The key questions Who gets the shares? –What’s in the will? Spouse / partner? –How will they generate income? Children? –How old? Majority or minority shares?

Business Protection The majority shareholder No power No market No guarantee of income The estate has no problem!

Business Protection Articles of association Pre-emption rights? -Must offer to existing shareholders first? Value clause -- How will the shares be valued? -- Problems of post death valuation But - Where does the money come from? Both the Estate and the company may have the problem

Business Protection The majority shareholder Run or work in the company? Appoint / remove directors? Strip retained profit out of the business? Sell the shares - To who? - At what price? - Check articles!

Business Protection Fair value For Estate In Trust or Company Share Purchase? The business ‘Will’ Life / CIC Policy Cross Option Agreement Fair value for EstateControl for the business

Business Protection Business trust Highly flexible Suits most businesses IHT / CGT issues if not set up correctly More expensive as premiums are a personal expense Company share Purchase Cheaper – company pays – no tax charge Easy to set up Complications on purchase Only suits certain companies Purchase paid from distributable profit Method

Business Protection BPR applies Spousal bypass – the problem Shares to Spouse IHT Free BPR-applies Inter-spouse Relief applies Shares sold Cash in spouse’s Estate fully exposed to IHT

Business Protection Avoiding IHT? Will Trust Cash loans to spouses Shares DIS benefits Il Rate Band? To trust IHT free Assets pass to next Generation poss. Free of IHT Assets pass to next Generation poss. Free of IHT Shares sold Avoiding IHT? Will Trust Cash loans to spouses Shares DIS benefits Il Rate Band? To trust IHT free Cash loans to spouses Loans repaid on death reducing estate

Business Protection Shares sold Avoiding IHT? Will Trust Shares DIS benefits Il Rate Band? To trust IHT free

Business Protection Shares sold What are the financial consequences? Will Trust Cash loans to spouses Loans repaid on death reducing estate

Business Protection Assets pass to next Generation poss. Free of IHT Assets pass to next Generation poss. Free of IHT Will Trust Avoiding IHT?

Business Protection Replacement costs Director loan account Bank loans & overdraft Contribution to GP Value of shares £ 100,000 £ 50,000 £ 150,000 £ 450,000 £ 250,000 Need 1 Key Person Cash Flow Summary of needs Need 3 Share Protection

Business Protection Summary of needs Possible total Replacement costs Director loan account Bank loans & overdraft Contribution to GP Value of shares £ 100,000 £ 50,000 £ 150,000 £ 450,000 £ 250,000 £700,000 Need 1 Key Person Cash Flow Need 3 Share Protection

Business Protection Business protection specialists Large sums assured Comprehensive CIC covers Pegasus WOL – long term care (LTC) option Highly flexible menu based plans Bespoke business increase options (GIO’s) Specialist technical and sales support teams Specialist underwriters Web support / calculators Master class training

Business Protection What creates the profit? ‘People, not machines, are the real source of profits in any business.’ ‘Take away my factories, my plants, take away my railroads, my ships, my transportation, take away my money; strip me of all these – but leave me my people and in two or three years I will have them all again.’ Andrew Carnegie

Why recommend Scottish Provident and how to sell more protection Are your clients indulging in unprotected success? Business Protection

The information in this presentation is based on Scottish Provident's present understanding of current law and practice and does not constitute legal and/or taxation advice. You may wish to use all or some of the slides from this presentation. But please keep in mind that if you use or adapt any of these slides for your own presentation, you must make sure it’s compliant with the appropriate regulations and incorporate any appropriate risk warnings. Scottish Provident does not accept liability for any adapted wording you may use in this presentation. SCPR5912 MAR10 Important information If you want to find out more, contact: NAME TO BE ENTERED Thank you.