Business protection – Shareholder protection

If a business were to suddenly lose a shareholder, it is likely to disrupt the company in many ways and possibly cause financial stress at a time you least expect or can cope.

A common approach for a shareholder protection policy, is whereby each shareholder has an ‘own life plan’ written under a business trust. However, there is a great deal of information to consider when taking out such policies.

If the shareholder dies, the proceeds of the sale of their shares would be distributed to their next of kin according to their will. But if a shareholder suffers critical illness, the other shareholders will receive funds from the trust set up under that shareholder protection policy, then buy the shares from them.

The value of shares increase as the business grows in value. If a shareholder were to die, their next of kin will inherit their share of the business. It is important to have a succession plan in place as the other shareholders may not want the next of kin involved in the business. Also consider that the next of kin may simply want to exit the business and as such will expect to be paid for their share. Not many businesses have the capital or cashflow to be able to accommodate this type of unexpected cost. Depending on how the lose has impacted the business, they may also find it challenging to secure a business loan while the business recovers. Shareholder protection enables the purchase of the shares to take place using the life policy that was put in place.

Yes, advice is highly recommended. The level of cover has to be calculated fairly, and the policies written into the appropriate type of trust. There may also be a need for an additional document called a cross-option agreement to be drawn up, this protects both the remaining shareholders (the company) and the deceased’s next of kin. Aspire Financial Services can provide the appropriate advice and work hand in hand with the top providers in the market.

Call us to for a free 30-minute consultation to find out how we can help you to protect your business.

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