Nobody wants to lose control of their business
Picture the situation – You have worked tirelessly over many years to build up your company with your business partner. Things are going well, and everything is looking rosy. Then, suddenly, out of the blue, your business partner passes away. An awful and tragic event that now leaves you with a lot of uncertainty and a question that needs answering about the future and stability of the business: What happens to their shares?
Who will you be in business with?
A common and likely scenario is that your business partner’s shares will be passed to whoever inherits them under their will or intestacy. Meaning you may now be in partnership with your business partner’s spouse or children.
This may be ok with you, however, it is worth highlighting a few consequences that could occur;
- The beneficiary may become active in the business and exercise their right to vote and make business decisions
- They may decide to retain ownership of the shares, take an income but do no work
- They may decide to sell the shares on the open market
And with this last point, you may have no say over who you end up in business with, which could easily be a competitor trying to muscle in and take control.
Nobody wants to lose control of their business, but unfortunately, this can happen more easily than you think.
Buying the shares back
An ideal solution for the business and likely the benefactors, would be to buy the shares back, but how would you do this, and would you have the funds available to buy the shares at short notice? This would require you to raise the money from your personal wealth, or if not, borrow from your bank, which some may not want to lend to a business which has just lost a key owner. On top of this, you would need to know a fair price for the shares and how much they are worth.
With such unknowns, is it wise to squirrel the money away for an event over which you have no control, or any idea it may happen?
How current are your current legal arrangements?
When was the last time you reviewed your current legal agreements? The agreements you made when you founded the business such as a partnership agreement, or in the case of a limited company, your articles of association.
For some, the answer is probably never. And at the time it was probably fine, you had just started out, the business was not worth much, it was something you were going to get round to.
However, many companies are leaving themselves exposed to unnecessary risk in their legal agreements and have not defined what happens should a partner be unable to work due to disability, serious illness or death.
A sensible solution: Shareholder and Partnership Protection
But there is a solution that businesses with two or more shareholders should be considering.
Shareholder Protection (limited companies) and Partnership Protection (partnerships and limited liability partnerships) is a type of business insurance that pays out a lump sum to the business, providing the financial means to purchase the shares back from the deceased partners benefactors. You can also include critical illness cover that will pay out in the event of the shareholder falling ill.
The remaining business owners keep control of the company and ensure that control isn’t passed to others and the deceased’s estate can sell their shares at fair market value. The arrangement is also tax-efficient.
Option to buy back the shares.
It is crucial when arranging a share protection agreement to include a cross option agreement. This is an agreement entered into by the shareholders, giving the option to buy back the deceased shareholder’s shares. It ensures that if a shareholder becomes ill or passes away, the sale of their shares runs fairly and smoothly.
It’s always best to seek professional advice when it comes to insurance. The team at Covertree can help you arrange your shareholder protection policy, to ensure the company you’ve worked so hard for will thrive and survive into the future.