Business Protection Episode 2: Shareholder Protection

In next instalment of our Business Protection blog series, Omar Din looks at shareholder protection.

What happens if a business owner dies?

The death of a business owner can have a profound impact on the foundations of a business, with both short and longer term implications for both the stability and viability of that business.

Continuity of the business is crucial; a business often represents not only the livelihood of you and your family, but also that of your employees and stakeholders.

How does the business carry on?

Apart from the emotional impact of a business partner dying; the stress involved with running the business in the aftermath can be severe. Dealing with the loss can be traumatic enough, without having any uncertainty or even disputes over how the company carries on. The family of the deceased will be dealing not only with the shock and grief, but may be concerned about their financial future, especially if the business was the main income and asset.

As a shareholder, would you wish to retain control of the business?

Probably yes.

After the shock, what would you want to happen?

  • For as smooth as possible transition through the tough time ahead; “Business as Usual”.
  • For family and fellow shareholders to be looked after to avoid financial uncertainty.
  • For a clear plan of what happens next, who remains in control: – a Succession Plan.

How could you achieve this?

A Shareholder Protection Insurance (SHI) ensures a succession plan is in place.

What is Shareholder Protection?

Essentially it is an insurance policy that safeguards shareholders or partners and hopefully allows them to retain control of the business.

What does it do?

It pays out a lump sum upon death (or critical illness) of an owner.

It provides:

  • the company funds to buy the shares from the family of the deceased shareholder.
  • the family the ability to sell the shares for a fair value in a tax efficient and pre-agreed manner.

Who benefits?

Both the ongoing owners and the family.

  • business continuity to the ongoing owners of the business
  • financial security to the family or beneficiaries

It provides company directors with peace of mind; knowing that they will have the necessary funds to retain control over the company.

  • The BUSINESS can return to normal as soon as possible; the shareholders retain control of their business without the strain of finding funding. Uncertainty is avoided.
  • The FAMILY are financially compensated for the loss of a (potentially major) breadwinner. They can walk away with what they deserve.

How does it work?

During the development of the succession plan and Shareholder Protection Insurance (SHI) shareholders will have pre – agreed how the holdings will be allocated. The SHI will reflect this via a series of legal agreements. If a shareholder dies (or suffers a serious illness) everyone knows how the shares are to be managed.

Broadly, it can be set up in 3 main ways**:

  • Own life plans under business trusts – with each shareholder taking out a plan on their own life.
  • Life of another plans, owned by the shareholders.
  • Company owned plans to buy back shares – the company takes out the insurance policies on each ‘life’.

Why consider Share Protection?

If a business owner dies with no share protection their share in the business will in all probability be passed to their family. This means that the surviving business owners could lose control of a proportion or, in some circumstances, all of the business. The family may want to sell and if the remaining shareholders haven’t the funds to buy they could even sell to a competitor. More unlikely, but possibly, the family may choose to become involved in the ongoing running of the business. Consequently the surviving owners are losing the control they had.  A share protection policy can help avoid these issues.

** These methods can be complicated and have differing tax implications; it is important to discuss the best solutions for your individual business.

 “Developing a “protection” strategy and knowing the right plan is in place, if the worst happens, provides peace of mind to many of our clients”.

Other episodes in this blog series

Episode 1: Tax efficient life cover
Episode 3: Business loan protection

Contact us

At MHA Tait Walker Wealth Management, we have a team of Financial Planners whose aim is to help businesses and individuals ensure they have the right protection for them, their families and their business.

Omar Din, the author of this blog, has over 13 years’ experience of working with personal and commercial clients.

Tel: 0191 285 0321

The purpose of this blog is to provide technical and generic information and should not be interpreted as a personal recommendation or advice.