How to integrate a shareholder and partnership protection scheme into your business plan

Following on from his last blog on business protection John O’Hare, Managing Director at Cameron Chase, focuses on shareholder and partnership protection schemes.

These schemes play an integral role if an owner or part-owner of a company dies unexpectedly. If you are a business owner you should ask yourselves the following questions:

  1. What would happen to the shares?
  2. How much are the shares worth?
  3. Could the remaining shareholders afford to buy the shares from the deceased’s estate?
  4. Are they allowed to buy them?
  5. Do the beneficiaries of the deceased’s estate want to join the business?
  6. Would the other shareholders want them?

The consequences of a shareholder dying are likely to result in:

  • The shareholding of the deceased passing to their estate
  • The remaining shareholders not having the funds or legal agreements in place to buy these back
  • The deceased’s estate not seeing the true value of the business unless they sell to a third party or get involved with the business themselves, often against the wishes of the remaining shareholders

Losing a fellow business owner could have a significant impact on your company, but many business owners will not have taken this into consideration. Such an occurrence can have far-reaching consequences i.e. the business would lose a valuable revenue generator, but also the remaining business owners may end up having to work with the deceased owner’s beneficiaries who may not have the necessary skills, experience or interest to continue in the business. Additionally, the owner’s interest may need to be turned into cash to pay death duties or provide for those that depended on the deceased financially.

Raising the finance to buy the interest of a deceased shareholder can be difficult and time consuming, and I would therefore recommend a Shareholder Protection Life Assurance policy that will provide a cash sum – it is from this cash sum that the deceased’s shares can be purchased.

There are a number of ways in which the life policies can be established and it is essential that the life policy proceeds are paid to the correct individuals, with a suitably worded Trust being the most effective method of achieving this. Having a robust legal and financial provision in place will help retain continuity, stability and control over the business whatever the eventuality, and this can be done by way of a double option shareholder agreement, along with appropriately written Wills.

A Cross option or double option agreement gives the remaining shareholders the option to purchase the deceased’s share of the company within a pre-agreed time limit and also gives beneficiaries the option to sell the deceased’s shares to the remaining shareholders. Furthermore, beneficiaries do not have a duty to sell to anyone else within the specified time limit.

At Cameron Chase we have the expertise to ensure you adopt the right shareholder or partnership protection solution for your business. In addition, we will work with your accountant to determine a fair and realistic valuation of your business.

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