We have created a three part series for important elements of business protection you need to consider: Keyperson Insurance, Shareholder/Partner Protection and Loan Insurance.
Here is an overview of Shareholder/Partner Protection:
What is it and why is it needed?
If a shareholder/partner(“participant”) dies, the family of the deceased will want to realise the value of the deceased’s holdings in the business. This could be a substantial sum and it is unlikely that the business will have sufficient liquid assets that could be realized to pay for the Shares/Partnership Share of the deceased. It may well be that the continuing participant’s are happy for the deceased’s family to join the business, but if this is not the case the business will therefore either have to be fully or partially liquidated to buy out the deceased’s family or, potentially as detrimental, the shares sold on the open market to a 3rd party. This could lead to an unwelcome takeover or Shareholder/Director disharmony.
In any event, the business would not continue in its current form as all would all have wished.
What is the Solution?
The business is valued and the proportion relative to each Participant agreed. The valuation does not have to be carried out formally – the key point is that all the relevant parties agree and the valuation is sustainable by reference to the accounts and projections of the business and is robust enough to automatically vary with changing circumstances. Individual life insurances are then put in place for each participant reflecting their share. The proceeds are paid to the surviving participants in the event of a death. To remove any possible conflict, a “double option” in put in place, where the deceased’s family have the right to sell and the surviving participants have the right to purchase the deceased’s holdings.
In this way, the business’s risk has been transferred to an Insurance Company and its’ future becomes a lot more secure.
Memorandum and Articles of Association are generally silent on the above so it is important to draw up a Shareholder/Partnership Agreement that fully reflects the above and the relevant ancillary details.
He was for many years a partner in medium-sized Accountancy Practices dealing with these issues on a regular basis. If you feel you need more advice on the subject please contact us and he will be happy to assist in any way he can.
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