THE DIFFICULT YET ESSENTIAL CONVERSATION

THERE ARE CONVERSATIONS YOU MIGHT NOT WANT TO HAVE BUT ARE ESSENTIAL FOR ANY ENTREPRENEUR. ONE OF THEM IS THE CONVERSATION AROUND WHAT HAPPENS TO YOUR SHARES IN YOUR COMPANY IN THE EVENT OF DEATH OR CRITICAL ILLNESS. HERE, I CATCH UP WITH PAUL MONK AND DARREN BRADBURY, ADVISERS AT FURNLEY HOUSE, A LEICESTER BASED FINANCIAL PLANNING SERVICES COMPANY TO DISCOVER WHY YOU SHOULD BE HAVING THE CONVERSATION FOR THE SAKE OF YOU, YOUR BUSINESS AND YOUR FAMILY

WHAT IS SHAREHOLDER PROTECTION?

It’s an insurance designed to ensure the smooth transfer of ownership and management in a company if one of the shareholders or business partners experiences an unexpected event –normally a death or critical illness – that affects their ability to continue their involvement in the business. Shareholder insurance is typically structured using a cross option agreement, which outlines the terms and conditions of the share transfer and the funding mechanism.

WHEN WOULD THE PROTECTION PAY OUT?

The insurance policy is designed to pay out a lump sum to the deceased or critically ill shareholder’s next of kin in exchange for the shares of the business. The remaining shareholders or business partners then maintain control of the company, preventing disruption and financial difficulties. But, if premium payments aren’t maintained, the benefits of the plan will be at risk. If premium payments cease altogether, so will the benefits of the plan. The cover may be less than you need if you don’t review it regularly.

CAN YOU GIVE OUR READERS A SCENARIO?

Say me and you were in business together and had 50/50 shares of the company… if anything happens to me, my shares immediately go into my estate to go to my next of kin, which is my wife. She would now own 50% of the business. My wife has her own career separate from my business and has had no direct experience in the running of the company but all of a sudden, she owns half of it and the other shareholder doesn’t have a say in it. She could also choose to sell those shares to somebody you don’t want her to. Ultimately, it can create some serious disputes between the remaining shareholders.

TELL ME ABOUT THE ‘CROSS-OPTION AGREEMENT’?

It’s part of the binding protection that says if anything happens to me in the mentioned scenario, then the shares will still go to my wife, but the shareholder agreement will pay out to buy those shares back. It means my family doesn’t miss out in any way and the shares go back to the business. The result is no disruption to the business and its employees. From my wife’s viewpoint in the scenario of being potentially left with either 50% of a business that she knows nothing about or £500k to look after her and our children, which is she going to choose? It is actually as simple as that!

SO, WITHOUT IT THE BUSINESS AND SHAREHOLDERS ARE VULNERABLE?

In a word: yes! If you don’t have shareholder protection, the continuity of the business can be compromised, affecting profits and the wellbeing of the team. No one tells you about this and many other types of business insurances you should have! What amazes me is the number of business owners who say they didn’t know they could or should protect themselves. The reality is that shareholder protection is an essential risk management strategy. It offers financial security, stability, and peace of mind for shareholders and the whole company.