By David Thurlow
Most businesses are small businesses; 99% of them, according to the Federation of Small Businesses, and it’s a subject they know a thing or two about. Many smaller, owner-managed businesses are successful in their field, with their value growing.
The major shareholders are often active in the business and they might be key to the success of the business.
Do you have a shareholder protection plan in place?
What happens to your business, family members and any shareholders should something unexpected happen to you or a key shareholder?
If a shareholder dies prematurely – or has a critical illness that means they can’t continue to work, this can make smaller companies incredibly vulnerable. The bigger the shareholder, the bigger the problem. Employees may have lost a friend, and they may fear for their jobs. It’s a tough time.
What happens to the shares owned by this individual?
Unless remaining shareholders can buy out the deceased’s shareholding, they could be left with a situation where the shares are in the hands of someone who has no knowledge of the business, no interest in the business, or someone who the other shareholders wouldn’t want to be a shareholder.
If they can buy out the shares, what would the strains be on their finances; and what if one shareholder could afford to buy out shares and others couldn’t? All this can seriously hamper the ability of the business to recover from the loss of losing a key shareholder; it might even be fatal to the business.
At the same time, the new shareholder may well not want the shares they have inherited. Most of the value of the estate could be tied up in the company’s shares and a widow(er) might be desperate to release this value, to secure his/her own future.
A share purchase agreement gives the relatives of the deceased shareholder the option to sell the shares, and the surviving shareholders the option to buy them. If either party exercises the option, the other must comply; inheritors must sell, and remaining shareholders must buy.
Set up correctly, entrepreneur’s relief on the death of the shareholder is protected.
Shareholder protection insurance provides the financial means for the surviving shareholders to buy the shares and the security for all shareholders that, in the event of their premature death, this can happen. It provides inheritors with confidence that they will receive the value of the shares, and won’t have to take up shares in a company they have no interest or expertise in. It provides remaining shareholders with the finances to buy out the deceased’s shares, at fair value, without creating personal financial difficulties for them at the very time they need to be focusing on protecting the business.
Critical insurance can also be provided, though here it is unusual for the other shareholders to be able to force a sale.
For many businesses, shareholder protection is as important as other business insurances you wouldn’t dream of going without. But to be effective, it must be set up correctly, and reviewed regularly to reflect the changing value of the company.
Bear in mind that the information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction.
Speak to one of our financial planning team on 01223 233331 or email us at firstname.lastname@example.org if you would like to review your shareholder protection needs.
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