Setting up a business is an exciting time, and while looking ahead at the opportunities that are opening up, perhaps the last thing on most entrepreneurs’ mind is the death or severely diminished health of either themselves or one of their business partners.
If you were to lose the contributions of a key business partner to ill health or worse, the impact on the workings of your business could be enormous. Not only would you lose the companionship of a business partner and possibly a friend, you would also lose their valuable expertise. Moreover, you could lose a share of your company to the spouses or beneficiaries of their estate, who may only be interested in the fiscal release-value of their inherited shares, and have little or no concern about the business’ future.
Steps to take
The answer is to think seriously about setting up some level of shareholder or partnership protection. This could help to safeguard you by enabling existing partners or company directors to purchase business shares from a deceased’s family if they should die or suffer a critical illness which prevents them from working. It is available to individuals in either a limited company, LLP or a partnership, and combined with good shareholder and ‘cross option’ agreements, can help to ensure continuity by providing insurance funds that you and surviving business partners could use to retain control of your firm should the worst happen.
There are a number of ways to go about taking out these insurances. Each principal could take out a policy on each of the others; this is a popular approach when there are just two partners involved in a business. However, matters can become complicated when there are three or more partners involved.
There can also be inequitable situations if the age difference between the business partners is significant, because the cost of insurance for older persons will be much higher. For three or more partners therefore, it is a common approach for each business partner to establish a policy on their life and place it in trust for the benefit of either the company itself or in appropriate shares to the other business partners/directors. If the worst should happen, the remaining shareholders can then use the funds received from the insurance to fund the purchase of the deceased’s shares from their family or estate and redistribute them amongst the surviving business partners according to the Trust and ‘Cross Option’ Agreements.
Is it worth it?
The costs of protection can be relatively low for life cover only, and for business people, is as important as arranging their own personal Will and Lasting Power of Attorney. These issues are equally important for long established businesses where frequently we find that no regular reviews have been undertaken on the business protection arrangements and circumstances, particularly the value of the business, have changed.
How we can help
We can help you find the best option for you and your business and assist with all the arrangements, setup and management. In the first instance, contact Graham Smithson, Senior Consultant at Hanover Financial Management Limited.