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What Happens When a Small Business Owner Dies?

The sudden death or illness of a company owner can have consequences for any size business, let alone a small business. Your small business could pass into the hands of a family member that's not well-liked, or it could even be sold to a rival.

There are ways you can protect your company from eventualities such as this. This post explains what shareholder protection insurance is and when it can be used to protect your business.

What can happen when a business owner dies?

The sudden death of a business owner can quickly destabilise the business and can lead to financial difficulties. The surviving business owners can lose control of a proportion, or sometimes, all of the business. If the family becomes involved in the ongoing running of the business, they could even sell the shares to a competitor.

What is Shareholder Protection Insurance?

Shareholder Protection Insurance allows the remaining partners or directors to stay in control of the business following the death of a business owner. This can prevent it from being passed to any family members.

A Share Protection Policy can help avoid these issues by providing the funds for existing shareholders to purchase shares. It can also provide a suitable mechanism for existing shareholders to retain ownership of the business.

Shareholder Protection Insurance protects a business and its shareholders by making succession planning as smooth as possible.

  • It provides the necessary capital for the remaining shareholders to buy the deceased owners share of the business
  • The business can continue trading as normal whilst the deceased owner's family can realise the value of their business interest
  • Gives a set structure and formal agreement as to what happens if the worst were to happen

How can Shareholder Protection Insurance help my business?

When a business owner dies without making provisions for their share of the business, the company will likely pass it on to their estate. The family then has two options for what they are going to do:

  1. A member of the family could take over the deceased owner's position as a partner.
  2. The family could realise the value of the business interest by selling it.

Both of these scenarios can lead to trouble for the business.

Losing control of the business

If a member of the family takes over from the deceased owner, there is no guarantee that they will be able to make any meaningful contributions to the running of the business. Their presence may even be detrimental to the business.

Sleeping partner

Having a sleeping partner who takes a share of the profits can be a burden to the remaining partners.

Alternatively, the family may be unhappy if it turns out they have no control over a business which is providing them a means of income.

Selling to an unwelcome party

If the shares are sold on, the remaining partners may find themselves working with an unwelcome new partner. Or there may be financial problems for the family and the business if no natural buyers can be found.

What does Shareholder Protection Insurance do?

Shareholder Life Insurance

If a shareholder dies, or suffers a terminal illness (diagnosed with less than 12 months to live), a shareholder protection policy can pay out a lump sum to the other shareholder(s).

Adding Critical Illness Cover to Shareholder Protection

Having Critical Illness Cover allows the plan to pay out if the shareholder were to suffer a serious illness. Three of the most common claims are for:

  • Cancer
  • Heart attack
  • Stroke

In addition to these conditions, it can typically cover anywhere from 20 to 100 serious illnesses, including multiple sclerosis and motor neurone disease.

Should I set up a Cross-Option Agreement?

This can be set up alongside the Shareholder Protection. Upon the death of a shareholder, it can provide an option for the other shareholders to buy the shares and the option for the deceased owner's family to sell their shares.

It is essential that the company's Articles of Association give both parties the option to buy / sell the shares rather than an obligation (An obligation to sell shares may result in an inheritance tax bill).

Should I get a financial advisor?

All of this sounds rather complex. When there are multiple shareholders with different holdings and different ways of structuring the protection, it can become even more complex.

Given the complexity of the situations and the levels of cover involved, it may be worth consulting a specialist broker, who can advise you on the policy options and compare quotes on your behalf.

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