5 Reasons Business Owners Should Set Up Shareholder Protection

What would happen to your company a shareholder died? Understandably, no one wants to think about themselves or their business partners dying. However, when you run a company it’s important to plan for such events.

Most of our clients want the company to keep control, with the deceased shareholder’s shares returning to the business. This commonly means buying back the shares from the family of the departed shareholder.

But could your company afford this, especially after the major shock of the death of a key shareholder?

Why Business Owners Should Set Up Shareholder Protection

That’s where Shareholder Protection Insurance steps in. It’s an insurance policy which pays a lump sum if a shareholder dies so the remaining shareholders can buy back the shares of the departed shareholder.

You can add Critical Illness Cover, so the other shareholders can also buy back shares if a shareholder exits the business due to serious illness, such as cancer, heart attack or stroke.

Clearly, Shareholder Protection Insurance plays a vital part in business continuity planning. Here are the top 5 reasons a business owner should set up Shareholder Protection.

1. Easy Access to Capital to Buy Back Shares

Most of our clients who are business owners come to us because they want the company to keep keep control of all its shares if a shareholder dies. This is understandable — read more about the consequences of losing control of them below.

However, in most instances when a shareholder dies their shares pass to their estate and then to their family. That means the business must pay to buy them back.

The obvious question here is could you / the company afford this, especially if the person who died was a major shareholder. It might not be easy to find that much cash within the business to do so. You may even have to borrow to afford it.

That’s one reason why business owners need Shareholder Protection Insurance. By providing a lump sum worth the value of the deceased shareholder’s shares, the policy ensures you’ll have to funds to stay in control of your company should the worst happen.

2. Financial Certainty for the Shareholder’s Family

Of course, it’s not just the company that might suffer if a shareholder dies. Another reason why business owners take out Shareholder Protection is to help the shareholder’s family if a shareholder dies.

Often, the shareholder is the main breadwinner. If that’s the case, could how would the family cope financially if they suddenly lost that income?

It’s all very well inheriting shares, but this doesn’t replace the shareholder’s actual income.

By providing easy access to capital for the remaining shareholders, Shareholder Protection lets you pay the shareholder’s family exactly what they deserve for the shares they’ve inherited. This can help them financially at a very difficult time.

Financial Security for Critically Ill Shareholders

Similarly, what would happen if a shareholder became critically ill and therefore had to leave the business?

They could face a lifetime of being unable to work, plus costs such as adapting their home due to a new disability. How would they afford this?

When business owners take out Shareholder Protection Insurance with Critical Illness Cover, the policy also pays out if a shareholder becomes seriously ill. The company then uses these funds to buy the ill shareholder’s shares, providing them with money to live on if they can never work again.

3. You Keep Control of Your Company

Clearly, both the company and the shareholder’s family would face difficulties if the company couldn’t raise the money to buy back a deceased shareholder’s shares.

The family would have shares but no immediate buyer to pay them what they’re worth. They might therefore look elsewhere, potentially even selling to a competitor to get the money they need to live on.

The business would then lose those shares — even a controlling stake in the company if the deceased was the majority shareholder — to what could be a third party rival. All this just because it didn’t have the funds to buy the shares back from the family.

4. No New Sleeping Partners

While the family selling to a competitor is a big risk, imagine there are no other natural buyers apart from the company. In that case, if the company can’t afford to buy the shares back, the family might enter the business as a sleeping partner.

They’d likely get a slice of the profits, even if they don’t have the aptitude to help run the company.

Moreover, their stake could mean they’re entitled to make decisions about the business. They could therefore push for changes on things they’re not happy about in a company they rely on for their income.

This rarely makes for good business. That’s why business owners need Shareholder Protection. If the company can afford to buy back the shareholder’s shares from the family, it provides a clean break for both parties.

That makes it easier for you to move on as a business and deal with the loss of a key player as you see fit.

5. Ensure a Smooth Business Transition

Lastly, when a business owner takes out Shareholder Protection Insurance, it ensures a smooth transition if a shareholder dies or becomes critically ill. The last thing you want after losing a business partner is to have to worry about finding the money to buy out their share of the business.

You might already be putting out fires with clients and suppliers who are concerned about what the sudden absence of a shareholder means for your company. Why add any more stress on top at what’s already a very difficult time?

Get Shareholder Protection Insurance Quotes & Expert Advice

Look, we’re not going to lie. While many business owners need Shareholder Protection, it’s one of the most complicated policies out there. It can be very tricky to go it alone.

For example, there are three distinct ways to set it up, each with its own tax rules. Furthermore, depending on how you arrange it, Shareholder Protection might be a P11D benefit in kind, which has tax implications for each shareholder.

It’s also a competitive market, so you’ll need to compare Shareholder Protection Insurance quotes from multiple different providers. Any of them could be the best option for your company.

With all this to think about and more, that’s why it pays to have an expert in your corner.

Business protection is our bread and butter here at Drewberry. We can help a business owner value their company for Shareholder Protection, plus assist with any paperwork, from cross option agreements to any trusts they might need.

Why Speak to Us?

We started Drewberry™ because we were tired of being treated like a number.

We know that our clients give so much to their businesses. They therefore deserve first class service when it comes protecting that business and their interest in it. Here are just a few reasons why it makes sense to talk to us:

• There is no fee for our service
• We are award winning 🏆 independent insurance advisers who work with all the leading UK insurers
• You’ll speak to a dedicated expert from start to finish
• We are very proud of the 3886 and growing independent client reviews rating us at 4.92 / 5
• Claims support when you need it most.
• We are authorised and regulated by the Financial Conduct Authority. You can find us on the financial services register here 🧐

At Drewberry, we understand the importance of advice. That’s why we offer fee-free advice to business owners who need Shareholder Protection Insurance.

We’re here to advise on all areas of business protection, so why not get in touch? Feel free to pop us a call on 02084327333. Alternatively, you can drop us an email at help@drewberry.co.uk.