Building a business from scratch is no easy task, and ensuring your business's success and longevity requires immense dedication and effort. However, when planning for the future of your involvement in the business - or your exit strategy - it’s crucial to consider the possibility that you or a co‑owner might pass away before reaching that point.
In such an event, what would become of the business and the welfare of the shareholder's family? What would happen if your business partner passed away, and their shares were inherited by their family? Would they sell them to you? Could you afford to purchase them?
1. What is shareholder protection insurance?
If a business owner dies, their share of the business usually passes to their beneficiaries, which means the control of that share does too. The other business owners may not have the money available to buy that share, so a shareholder protection policy can provide a lump sum to help them make the purchase and regain control of the business by purchasing the share from the deceased or incapacitated owner’s family.
- Shareholder protection is designed to ensure business continuity in the event of the death of a shareholder
- Insurance can be taken out by fellow shareholders or the company
- Policy proceeds are used to help buy the share of the business owned by a shareholder who has passed away
2. Why is shareholder protection important for businesses?
Losing a shareholder can have a destabilising, and sometimes devastating, impact on a business, which could include:
- Losing control of a proportion, or even all, of the business, causing significant disruption to operations.
- Having to take out loans or liquidate business assets to be able to find funds quickly to purchase the share.
- Leaving the sale of that share to a competitor
- Working with a beneficiary whose priorities may not align with yours
3. Who needs shareholder protection insurance?
Any business that is owned by multiple partners or shareholders should consider putting in place a shareholder agreement and protection, such as:
- Small and Medium-Sized Enterprises (SMEs): These businesses often rely heavily on a few key shareholders, making protection insurance essential to ensure continuity and stability.
- Family-owned businesses: In family-run companies, shareholder protection insurance helps preserve the business within the family and prevents disputes among heirs.
- Startups: New businesses with a few founding shareholders can benefit from insurance to protect their initial investment and ensure the business can continue to grow even if something happens to one of the founders.
- Closely-held corporations: These businesses, where shares are not publicly traded and are typically held by a small group of people, need insurance to handle ownership transitions without disrupting operations.
- Joint ventures: Businesses formed through joint ventures can use shareholder protection insurance to manage the complexities of shared ownership and ensure the venture's success in case of unforeseen events.
4. How does shareholder protection insurance benefit shareholders’ families?
Shareholder protection insurance can help to do more than protect the interests of your business, it can provide reassurance that the families of shareholders don’t have to have the additional stress of selling their share to an outside party or taking on a significant role in the business against their will.
Shareholder protection benefits the family as:
- They can be assured that they will receive a fair value for their shares upon the death of their loved one.
- They potentially won't feel pressured to get involved in a business they know nothing about or have no interest in.
- The shareholder can have peace of mind knowing their family will be taken care of and that the cover is there to help mitigate any disputes after their passing.
- If the insured person suffers a critical illness, such as a stroke, they have the option to compel the remaining shareholders to buy their shares, if desired.
Claims example
Scenario:
ABC manufacturing Ltd., founded by John, Sarah, and Michael (each holds 33.33%), produces eco‑friendly packaging solutions. John unexpectedly passes away from a heart attack. His shares go to his family, who have no interest in the business.
The value of shareholder protection insurance:
- The policy covers each shareholder’s share value (£500,000)
- Sarah and Michael receive payout and buy John’s shares from his estate
As a result:
- The shareholder protection insurance policy effectively prevents potential disputes and financial strain for both the company and John's family
- Sarah and Michael can continue to run the business without disruption
- John's family receives the financial compensation they are entitled to without needing to engage in the business