A Business Necessity

Have you considered what would happen if you or a co-owner of your business died or was too ill to be able to continue working? Or what would happen to your share of the business if you died or were too ill to work?

At Forward Plan we can help put in place policies to ensure families and businesses can survive if tragedy strikes.

If your company doesn’t have shareholder or partnership protection (called shareholder protection for this article), please contact us now. We offer an initial consultation to review your requirements (and any existing provision), before offering your business financial planning advice. For more information call Andrew Parmenter at Forward Plan on 01303 767650.

If your business lost a major shareholder or business owner through death, serious illness or injury, would it be able to continue?

Putting in place shareholder or partnership protection benefits your company. If a business owner is critical to running the business or provides equity to finance the business, it’s important you consider purchasing shareholder protection.

If there isn’t a shareholder protection plan in place, in the event of a shareholder or partner’s death their share will pass to their estate, and therefore your business could become partly owned by someone who is not interested in the future of your business, or perhaps worse still, someone you don’t get on with!

As a business owner if you were to die, be seriously ill or injured and be unable to work, you would want your beneficiaries to receive the full market value for your shareholding. With shareholder protection in place the beneficiaries of any shares can sell them to the company’s remaining owners, as the continuing owners will have the money available from the protection policy to make the purchase, which ensures the deceased’s or infirm’s family receive fair value for their shares.

Given the chance most surviving owners of a business would want the opportunity to keep control of their business and buy back the deceased or infirm owner’s shares, but unless you put shareholder protection in place you may not have the necessary finances available at the time, e.g. not enough in the bank account, lack or unavailability of personal funds, lack of borrowing power from a bank now that a senior person is no longer a part of the business; so buying back shares by the continuing owners may not be possible and the owners may be forced to sell shares to an outsider.

Shareholder protection can provide the necessary funds to buy back the shares from a third party, so the surviving owners can purchase the deceased owner’s business share from the estate. A business can also add critical illness cover so shareholders who are diagnosed with a critical illness can choose to sell their shares back to the company if they become ill and can’t work.

When you have a shareholder agreement and protection arranged, the buyers are already in place and have the funds though a shareholder protection plan. If there is no shareholder protection and the deceased beneficiaries, now owners, are forced to sell shares to an outsider, they may not receive the best price available for the shares, or worse still there may be no available buyers, which is often the case for small businesses.

The beneficiaries of a shareholding could become involved in the management of the company, together with taking on responsibilities which may not be what they want.

There are several business protection options available to shareholders and partners. A shareholder protection plan creates a contractual framework to support business continuity and succession planning. At Forward Plan, we normally recommend you set up a protection plan using life assurance with (or without) critical illness cover policies which are placed in trust.

Each of the business owners takes out life cover proportionate to their shareholding size and the value of the business. As each owner will be individually underwritten, the premiums will vary even for the same level of cover and therefore the premiums can be equalised so that each owner pays the same premium. Alternatively the business can be the owner of the policies.

For shareholder protection to work effectively, each shareholder must set up and maintain a life assurance or life assurance with critical illness cover policy which is written in trust with all the other business owners. An agreement will be set up which covers all owners and a cross option agreement is set up which underlies the share purchase arrangement. It is recommended this is set up as a trust document.

You should also set up a written agreement between the shareholders of the business, so you are all aware of the company’s business continuity plans.