Although we face many unpredictable challenges in our lifetime, for SME owners the impact of the loss of a shareholder to your business is one that you can and should be prepared for.
In the unfortunate event that a shareholder dies or becomes seriously ill, the most important thing to ensure is the continuity of the business. Shareholder protection is a means of achieving this goal. This type of protection will provide a company’s directors with the peace of mind of knowing that they will have the necessary funds to retain control over the company.
To put this in perspective, Legal & General research found that 30 per cent of business owners surveyed have no will and no specific instruction in place on what would happen to their shares should they pass away. Just as concerning is that only 34 per cent of business owners have a will in which their shares are left to a named beneficiary, while a further 27 per cent have a will, but do not specify what should happen to their shares.
Shareholder protection is vital for any business, no matter how big or small. Without this form of protection in place, shares can be tied up in probate, potentially to paralysing a business and prevent it trading. With this in mind, it is staggering to see that Legal & General’s research has shown that nearly one in ten businesses would grind to a halt if a shareholder passed away.
Unfortunately, many business owners are not aware of the risks they take by not taking out life cover to buy shares in the event of another owner’s death. In addition, many directors do not leave any instruction in their will on what should happen to their shares should they pass away. It’s not an easy conversation to have, but it need only happen once and then the set procedures will be in place to ensure the business has the best chance of remaining afloat in the event of such a crisis.
It is clearly a topic that needs to be discussed. Nearly four out of 10 (37 per cent) businesses surveyed as part of L&G’s research say they did not have any form of cover in place, and this figure jumps to 57 per cent for of small businesses, which is worrying. This issue can heavily impact any company, regardless of the size, but it is particularly harmful for smaller companies who often won’t have the resources available to deal with this kind of incident.
Share protection is a simple way to create a guaranteed market place for the shares in a small business. With the use of a life policy on each shareholder and a cross option agreement, the proceeds of the policy will give the company the resource to buy the shares from the family of the deceased shareholder and for the family to be able to sell the shares for a fair value in a tax efficient and pre-agreed manner. This means that the remaining shareholders retain control of their business without the strain of finding funding, whilst the family can walk away with what they deserve.
Unexpected events like these will always be difficult for everyone involved in the business, but it is essential that companies have a sound financial plan in place should the unthinkable occur. Business owners need to speak to a financial adviser in order to ensure that their company has the correct form of protection in place to suit their individual requirements. It is all too easy to push these conversations to the side for another day, given the difficult content. However, there is a clear need for business owners to address this issue, as the unexpected death of a shareholder can have a devastating impact on a business that can sometimes be impossible to recover from.
Richard Kateley is the head of intermediary development at Legal & General.