The importance of securing your business’ future with shareholder protection insurance

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?

In this article, we explore how shareholder protection insurance works and why it is an essential consideration when thinking about the future of your business and the financial well-being of your or a significant shareholder’s loved ones.

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.

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. 

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.

How does shareholder protection benefit the shareholder’s family?

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.

It 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.

An example of how much shareholder protection insurance might cost:

The cost of shareholder protection varies depending on various factors such as the age, health and lifestyle status of the individual shareholders, and the amount of cover and policy length required.

Here is an example of what it could cost for a business worth £1,000,000 of which there are two owners, each with a 50% shareholding, therefore £500,000 of life insurance each.

Age	Policy length	Monthly premium*
35	30 years	£23.79
45	20 years	£40.18
55	15 years	£71.63

*Quotes are indicative figures only, and are subject to medical underwriting, but based on non-smoker status, level life cover only of £500,000, to age 65.

What a shareholder protection insurance claims example could look like:

ABC Manufacturing Ltd. is a private limited company specialising in producing eco-friendly packaging solutions. The company was founded by three equal shareholders: John, Sarah, and Michael. Each of them holds a 33.33% stake in the company. They have worked together for years to build a successful business with a solid reputation in the industry.

Scenario:

John, one of the founding shareholders, unexpectedly passes away due to a heart attack. His untimely death leaves a significant gap in the company's leadership and raises concerns about the future ownership structure. John's shares are now part of his estate and will be inherited by his family, who have no interest or experience in the packaging industry.

Fortunately, ABC Manufacturing Ltd. had previously taken out a shareholder protection insurance policy. The policy includes life insurance coverage for each shareholder, with the sum assured equal to the value of their respective shares. The policy's terms state that, upon the death of a shareholder, the remaining shareholders will receive a payout that can be used to purchase the deceased's shares from their estate. A review of the claim takes place and assesses the value of John's shares, which, according to the company's valuation are worth £500,000.

Outcome:

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 ABC Manufacturing Ltd. without disruption, and John's family receives the financial compensation they are entitled to without needing to engage in the business.