The sudden loss of a business owner has the potential to destabilise a business and can quickly lead to financial difficulties.
If no share protection arrangements have been made, the deceased’s business shares may be passed to their family. Their family might then choose to actively participate in the running of the business or sell said shares – even to a competitor.
As a result, the surviving business owners could end up losing control of a proportion or, in some cases, all of the business.
With share protection though, the remaining partners, directors or members can remain in control of the business following the death of a fellow shareholder.
However, more than half (51%) of small business owners in Britain have left no instructions in their wills or made any special arrangements regarding shares, according to Legal & General’s latest State of the Nation’s SMEs report.
Following the death of a fellow shareholder, just over a quarter (26%) of shareholders said they would buy deceased business owner’s shares and more than half (51%) said they would need to rely on personal wealth to do so.
Despite this seeming oversight, less than two in every five people (38%) had considered how a life policy could help.
Just over one in five (21%) said they thought that the deceased business owner’s beneficiaries would inherit their shares and become active in the business.
More than a third (36%) of SMEs with a worth of over £5 million also had no share protection insurance, which would enable them to buy back the shares through a lump-sum payout and avoid the impact of shares being tied up in probate.
The L&G survey of over 800 small and medium-sized businesses also found that only 41% of companies actually had a shareholders’ agreement. Furthermore, only 32% of businesses had reviewed their Articles of Association in the past year, while just 40% had reviewed their Partnership Agreement in the same period.
Worryingly, one-third (33%) of businesses have not reviewed their Articles of Association or Partnership Agreement since their business started.
Commenting on the findings of the research, Richard Kateley, head of intermediary development at Legal & General, said: “For those established SMEs that have a presence in their chosen market, the death of a business owner can be hugely significant should there be no plan in place or an arrangement regarding company shares. This could lead not only to shares being tied up in probate, paralysing an SME’s operations if this was a majority share, but could see the beneficiaries of these shares becoming involved in the business, whether or not they have any aptitude. Or, in the worst-case scenario, selling those shares to a competitor meaning the surviving owners losing control of their business.”
He added that many business owners consider their business as a way to fund their retirement. But a sudden death could jeopardise not only their family’s financial wellbeing, but also their fellow shareholders due to the impact on the business.
By taking out the correct internal shareholder cover, business owners can protect their interests in the event of a shareholder death and not need to rely on their personal savings to acquire these leftover shares.
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