Protecting you and your business: Safeguarding shareholders

Protecting you and your business: Safeguarding shareholders

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.

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, you would wish to retain control of the business for:

• as smooth as possible of a transition through the tough time ahead (“Business as Usual”)
• family and fellow shareholders to be looked after to avoid financial uncertainty
• 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. Essentially it is an insurance policy that safeguards shareholders or partners and hopefully allows them to retain control of the business.

An SHI 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.

Both the ongoing owners and the family benefit from this, 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.

During the development of the succession plan and 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’.

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

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.

We are here to help

At Azets, 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. Our Wealth Management team will discuss and explore with you your particular circumstances, with the aim of developing a strategy so that appropriate arrangements and protection mechanisms are in place should anything untoward happen.

For further information on safeguarding shareholders, please get in touch with your usual Azets Wealth Management advisor or a member of our Wealth Management team.

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

Azets Wealth Management is a trading name of Azets Wealth Management Limited, which is authorised and regulated by the Financial Conduct Authority. Registered Office: Bulman House, Regent Centre, Gosforth, Newcastle upon Tyne, NE3 3LS. Company Number 05674020. Incorporated in England. Azets Wealth Management Limited is a subsidiary of Azets Holdings Limited.