Planning for the worst-case scenario – why small business owners need Shareholder Protection Insurance

Small businesses often keep it in the family. If a company owner dies suddenly, their shares can end up going to a family member outside of the business. For the other business partners, the consequences can be catastrophic. The company could be sold off to someone outside of the family or end up in the hands of a competitor.

Sudden deaths can cause a business to become unstable. Business owners should always plan appropriately for the worst-case scenario. If they don’t, the surviving owner loses control of some, or all, of the business. This could spell the end of the company.

Small business owners need Shareholder Protection Insurance

Despite this, research shows that half of small business don’t have a legal structure place to deal with these potential issues. Without a legal document showing that they can buy a colleague’s share from his or her family members when they die, they have no say over what happens to those shares. And for lots of small and medium sized businesses (SMEs), this could mean a total loss of control over the company.

Just 43% of business owners have any form of business life cover in place to prepare for their sudden death or if they become incapacitated. This is where Shareholder Protection Insurance comes in.

This type of insurance allows the remaining directors or partners to keep control of the business should the business owner die. With no share protection policy in place, the deceased owner’s business share will most likely go to a family member not involved with the business.

Why is Shareholder Protection Insurance a good idea?

The share protection policy can avoid all of these awkward problems. It works by providing funds to buy shares, and also means existing shareholders retain ownership. Shareholder Protection Insurance will protect the business and all of its shareholders by simplifying success planning. Here’s what it can do:

1. Provides money for the shareholder or shareholders who remain after the death to buy the deceased owner’s shares.
2. Allows the business to continue trading in the normal way during the upheaval.

The State of the Nation’s SMEs report from Legal & General says that 53% of businesses would be forced to stop trading in under 12 months if a major business owner or key person became critically ill or died.

Around 60% of small businesses have not renewed or reviewed their company succession plans or agreements over the previous 12 months. And if a business owner or business partner dies without leaving specific instructions for their business shares, then the shares will most likely go to their estate.

The family that receives ownership of the shares then has two choices:

1. A family member could replace the deceased as a business partner or part-owner. Should a family member decide to do this, there is no guarantee that they can make any realistic contribution to the company. It’s possible that they could even damage the business.

A sleeping partner is still entitled to their share of the business profits but could end up as a burden to the remaining partners. It’s also possible that the family becomes unhappy if they find they have no real control over the business.

2. The family could choose to sell the business and realise the value that way. This could mean the remaining partners end up working with someone they either don’t like, don’t know, or doesn’t represent their aims. It could also be that the family can’t find a buyer, which will have a negative financial impact on the business.

Shareholder Protection Insurance covers the following:

• Shareholder Life Insurance – if a shareholder becomes terminally ill (this is defined as fewer than 12 months left to live) or dies, the policy pays out a lump sum of money to the other shareholders.
• Critical Illness Cover – this can be added to Shareholder Protection. This will allow the policy to pay out if the holder becomes seriously ill. The most common claims under this include heart disease, cancer and strokes. However, it also covers up to 100 serious conditions including motor neurone disease and multiple sclerosis.

Alongside Shareholder Protection, it’s advisable to set up a Cross-Option Agreement. On the death of the holder, it gives the option for other shareholders to buy the deceased’s shares and for the deceased person’s family to sell.

How do claims work under Shareholder Protection Insurance?

A claim is made under the policy.

1. If the policy is written under trust, then the insurer will pay the amount to the trust. The trustees are therefore the remaining shareholders.
2. These shareholders then use the money to buy the shares of the dead or critically ill person’s share.
3. The family of the deceased, or the critically ill stakeholder themselves receive the money from the sale of their shares.

James Turner, Managing Director of Turner Little Limited says: “Shareholder protection insurance is something that every business owner should have in place. As these figures show, a relatively high percentage of businesses have no succession plans. A legal agreement on what will happen should a key member of the shareholder team, or the business owner, dies suddenly is vital.”

“While a sudden death or diagnosis of a terminal illness is devastating for the person involved, what happens to their business shares can impact negatively on a far wider number of people. Depending on the number of shareholders, the protection structure can become complicated relatively fast. It’s always a good idea to speak with an expert like Turner Little for advice on the best insurance policy and compare quotes for you.”

About Turner Little
Founded in 1998 in Yorkshire, UK, Turner Little is a specialist UK and offshore company formation, banking and corporate services provider. Our services include company formation, UK and offshore banking, asset protection, credit correction, trademarking and trusts. Other services include Internet services, mail forwarding, wills and probate. Turner Little’s vision is to offer the best possible service, together with market leading products.