Business Protection – Is your business protected in the event of a death or illness of a co-owner?

In the initial stages of setting up a company, the focus is naturally on making that business successful and profitable. Often, however, little or no thought is given to what would happen to the co-owners of the business, in the event of their death or illness.

The reality, if nothing is done, is that the shares pass to the deceased’s estate. Moreover, the remaining shareholders may not have enough cash to buy the shares. This creates a difficult situation, where the widow(er) of the deceased not only has to deal with the loss of their partner but also becomes a shareholder in a business which they may have little ability or desire to own.

Our question to you therefore: Do you have an exit strategy in place for the death of an owner or key stakeholder?

A simple solution is Life protection. This can be used to provide cash to the value of the shares of a deceased shareholder. A common arrangement is for the shareholders to take out life policies for the value of each other’s shares. If a shareholder dies (or becomes critically ill) the policy proceeds are paid to the other shareholders, giving them the necessary capital to buy the shares of the deceased. To make things work, there is a formal option agreement, allowing either party to exercise the purchase and usually setting out terms of the purchase, such as the company valuation. This protects the arrangement from inheritance tax.

Even if the answer to our question is, “I already have completed this,” we strongly recommend our clients regularly review the cost of cover, in the same way you would review the costs to insure your offices, premises, business vehicles and equipment.

The reason for raising this? CBW recently merged with a company where this very thing happened. It has been a sad and unfortunate incident for us to deal with but, thankfully, life cover and relevant agreements were in place. This ensured that the beneficiaries have been able to acquire a monetary value for the shares, and that the business has been able to continue without interruption for the clients or employees. In these tricky times, difficult conversations about raising capital for the shares were avoided.

Further information

If you would like to talk through any area of Business Protection such as Shareholder Protection, Keyman or Income Protection, then feel free to speak with one of the CBW Financial Planning team who will be happy to assist you.