Shareholder protection – prepare your business for the unexpected
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
Is your business fully protected if a key shareholder (e.g. director) dies? When this happens, his/her beneficiaries inherit the estate – including shares in your business. This could potentially leave a lot of decision-making power in the hands of people who have little or no interest (or experience) in your business. Fortunately, shareholder protection is designed to help protect both the beneficiaries and other shareholders in this situation.
Below, our financial planners explain how shareholder protection works, the benefits of using it and how to integrate it into a wider financial plan for a business. We hope you find this content helpful. If you want to discuss your own financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
Shareholder protection: an overview
The loss of a key shareholder is often, itself, traumatic for a business. Perhaps you lose a vital salesperson who was responsible for bringing in significant revenues, which are no longer guaranteed. Maybe a senior manager with a large, trusted client base can no longer be the “face” of the business for these clients. Yet, without shareholder protection, you also likely have the added complication of what to do now your former colleague’s share is in the hands of their loved ones – who may not be willing to relinquish it.
Shareholder protection is a legally-binding agreement between shareholders. It requires shares of a deceased signatory to be bought back by the business – and provides a lump sum to do so (similar to a life insurance policy). The business pays a regular premium to the policy provider once it is in place. For an additional cost you can include extras like critical illness cover, in case a key shareholder can no longer work due to diagnosis of a specific condition (e.g. cancer).
The benefits of shareholder protection
For business leaders, a key benefit of shareholder protection is the peace of mind it brings. No longer do you need to worry about how to get funds together to buy shares back from a grieving family (or wonder how to get them to agree). It is also typically more tax-efficient than saving up your own business “emergency fund” for this scenario using company profits (which are subject to corporation tax). Instead, the premiums for your policy can usually be treated as an expense.
The lump sum that is released, moreover, can help tide over the business while you consider what to do. Perhaps it could be used to help fund a recruitment drive to find a replacement for your old colleague. Possibly, it can plug a temporary revenue gap if he/she used to bring in a lot of new business. Finally, shareholder protection can also be very comforting for the deceased’s family members – who have certainty that they will get a specific sum from selling the shares.
Financial planning considerations
Setting up your business with shareholder protection requires careful thought. First of all, who do you insure? Smaller companies will quite likely need to insure all of shareholders, since each individual will probably have a large “slice” of the pie. However, larger companies with dozens of shareholders may need to use more discretion. The more people you insure, the more expensive the policy is likely to be. A financial adviser can help you look through different options here. Secondly, which type of policy do you choose?
Shareholder protection, after all, comes in three broad forms. A “life of another” policy provides each owner with their own policy, each with premiums based on factors such as age, health and lifestyle markers (e.g. smoking). If this person dies, then his/her policy pays out to the remaining shareholder(s) so the deceased’s shares can be bought. A second route is to write each policy of the shareholders into a business trust. This allows a payout to be distributed proportionately should anyone die. Finally, the third option is for the business itself to buy a policy (and pay premiums for it) and then the business gets a payout when a shareholder dies.
Another consideration is how much payout the company needs. This can be particularly hard for smaller, unlisted companies to figure out. Enlisting an accountant’s help is useful to start getting an idea of valuations and necessary payout amounts. Checking your Articles of Association can be helpful, as this will define the roles of different people (e.g. directors), how shares are handed out and how directors are appointed. Other things to factor into the calculations are the dividend yield, net assets of the company and multiple of profits.
For complete peace of mind about which type of shareholder protection you need and how much payout you need, consider speaking to a financial adviser who specialises in business protection. They can help you narrow down on your options and provide a suitable range of policy choices from the wider market – identifying the best, most cost-effective solution for your business goals and needs.
Invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
