Shareholder protection - what happens to my business if I die?

If you’re the owner of a small and medium-sized enterprise (SME), you play an essential role in society. According to research from Legal & General, SMEs employ 81.6% of the workforce in the UK.

Businesses like yours are the lifeblood of the UK economy, but you’re also arguably under more pressure than ever before. With a breakneck rate of change, businesses today must juggle the challenges posed by Brexit, disruptive new technologies, economic volatility and ongoing changes to the tax regime.

So, it’s understandable if you haven’t yet made a plan for what will happen in the event of the death or critical illness of a director, key shareholder or star employee.

Maybe you think it’s not necessary. But as you’ll know better than anyone, successful businesses depend on their top people – and great leaders, networkers, innovators and salespeople are, by definition, a rarity. Losing one of your founders or top performers could deliver a crippling blow to your company, and ultimately, your livelihood.

Thankfully, unlike all the other uncertainties you’ve got to deal with, the worry of losing a key employee or shareholder is easily resolved, through a type of insurance called 'business protection.'

Business protection provides a vital safety net if one of your key people dies or becomes critically ill. Depending on your most pressing liabilities, it can take several forms. However, according to chartered financial planner Nick Thomas, SME business owners tend to share a common worry:

“The number one thing my business-owning clients want to know is, ‘if I die, will my spouse and kids be able to benefit from all my hard work?’ It’s not like having shares in a public listed company, where you can just sell the shares on the stock market to release the cash,” Nick says. “It’s a real concern – because what if no-one can afford to buy out your share of the business after you die? Then everyone’s stuck.”

Unless your will states otherwise, in the event of your death, your share of the business will pass to your next of kin. This might compromise the remaining directors’ control over the business. What’s more, if the remaining shareholders lack the liquid cash to buy out your beneficiaries, it would leave your hard-earned equity locked up in the company, of no benefit to your family.

Fortunately, a type of business protection known as ‘shareholder protection’ guards against this scenario. If a shareholder dies, the remaining directors receive a lump sum from the insurance provider to buy back the remainder of the business from the estate of the deceased. This means that there’s absolute clarity on who will run the business if an owner dies unexpectedly.

You can also rest assured that, if the worst were to happen, your loved ones would be able to access the wealth you’ve worked so hard to create. It’s usually set up in conjunction with a ‘business will’, which gives specific instructions as to how ownership of the business will be transferred upon the death of a director or key shareholder.

Interested to know more? An independent financial adviser will be able to answer questions and provide advice specific to your business and circumstances.

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