Who will run your business with you after the death of a shareholder?

Protecting the owners of a business and ensuring its long term survival should be an integral part of any business plan.

Businesses will as a matter of course already protect their property, stock, fixtures and fittings.  However, they often overlook their most valuable assets; the business owners.

  • Would you want your estate to receive the value of your share in the business on your death?
  • If a fellow business owner died, would you want to retain total control of the business?

The loss of a shareholder could be catastrophic by destabilising a business and could lead to financial difficulties. Additionally there could be uncertainty over the ownership of the business, which may lead to funding being withdrawn by lenders or loss of confidence by clients.

If shareholders don’t have the appropriate insurances and agreements in place then if a deceased shareholder’s family want to sell to the remaining shareholders, the finance may not be available.  The family may then sell the shares on the open market, which could mean a competitor involved in the running of the company. The remaining shareholders could end up running the business with someone who they don’t even know.  The actual process will depend on the Memorandum and Articles of Association and / or any separate shareholder agreement. Worryingly:

  • A third of limited companies have not reviewed their articles of association since the business started.
  • Over 50% of business owners have not left any instructions in their Will or special arrangements regarding their shares.

(Source: L&G State of the nation’s SMEs report 5th edition)

For minority shareholders the lack of agreements and source of finance can mean that their shareholdings have no value and therefore their families are left without financial means.  The appropriate business protection policies with a cross option agreement can solve this problem.

Even where agreements are in place, where would the funds come from to purchase the shares?

  • Would the remaining business owners have enough personal wealth?
  • Would a bank loan be available?
  • How would the shares be valued?

Shareholder protection insurance, along with the correctly drafted agreements, allows the deceased estate (family) to sell the shares to the remaining shareholders and for those shareholders to purchase the shares.  This protects the remaining shareholders and can provide financial security for the deceased’s family. The insurance policy provides the funds to the remaining shareholders, helping them to purchase the shares.

Even if cover is already in place, it is important to also regularly review any existing shareholder protection for the following:

  • New shareholders and/or changes in the percentages
  • The current market value of the business – whether it has increased and whether the shareholders are under insured
  • The number of years of cover remaining
  • Changes in the business

If you would like to know more about shareholder protection, please contact Dion Prideaux-Reynolds on 01635 551333.

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