The unexpected death of a shareholder can be devastating for any business.
Not just in terms of the personal loss and tragedy, but also in terms of the potential financial damage that can be done.
In fact, the death of a key shareholder or executive is one of the reasons many business’ fail as they’re unprepared for such an eventuality.
If a shareholder dies, the remaining shareholders will need to be able to purchase the outgoing shares to ensure they retain control of their company, but also to ensure the outgoing shareholders estate receives fair payment for the shares.
But there’s no guarantee these funds will be readily available (because a death is usually so unexpected) and even if the funds are there in a business’ savings, it’s a big risk to pull such a large amount out of a business in one go.
This is why shareholder protection can be so important because it at least helps alleviate the financial implications of suddenly losing a shareholder and can provide the means to retain any shares (and control) in the company.
In this article, Rigby Financial discusses the main reasons why your business should invest in shareholder protection.
- Protect your business’ immediate financial position
In the event a shareholder dies the remaining shareholders will have to buy any outgoing shares if they want to retain them in the company.
The jeopardy in not buying them back is that the shares could end up in the hands of a third party who could benefit from the profits of the company despite making no contribution, or, they could end up in the hands of a competitor or other party who wants to be involved in the business.
But buying the shares back could be easier said than done without shareholder protection.
One option is to use the company’s reserves or savings (assuming they’re at the level that could fund a share purchase) but there’s no guarantee you could pull such a large amount of resources out of a business without putting its position at risk.
And it can be difficult to secure a bank loan to buy back funds as most banks will be reluctant to lend to a business going through such an extreme form of uncertainty.
Shareholder protection ensures the funds are available to buy back any shares, without putting a business’ finances in jeopardy.
- Avoid disruption as the shares are transitioned
Usually, any shares that belong to a deceased shareholder will be passed on to their estate (unless there’s a shareholder agreement written stating the shares will be sold back to the remaining shareholders).
If shares are to be passed on to an estate, it can cause some serious disruption that could harm a business’ profits.
For a start, unless there’s a shareholder agreement in writing stating that shares must be sold back to a business, there’s no obligation for the shares to be sold back to the business.
The deceased’s estate could simply hold the shares and benefit from the profits, or sell the shares to another party.
With a shareholder agreement in place along with shareholder insurance, there is a legal agreement ensuring the smooth transition of the shares back into the company, along with the funds available to ensure the transfer happens quickly.
- Get clear guidance on the value of each shareholder’s shares
While a deceased shareholder’s estate could decide to sell their shares to a third party (provided there’s no agreement in place) it doesn’t always guarantee they’ll get the right – or even a fair – price for their shares.
With shareholder protection insurance in place, part of the policy is to determine the value of the shares, to ensure the business has enough cover for the costs.
This share evaluation should be done on a consistent basis as the business grows (and the value of the shares increases with it).
This share valuation ensures that the deceased’s estate or beneficiaries will get a fair market value for their shares when they’re sold back.
- Ensure peace of mind for the future of shares
The ultimate goal of investing in shareholder protection insurance is to provide peace of mind to all parties that in the event of a shareholder’s death, those remaining in the business will be able to retain the shares and the control of the company, while providing financial reassurance to the estate that they’ll get the financial benefits of the sale.
Keep your business protected by investing in shareholder protection insurance
No-one wants to think about the prospect of losing a shareholder in such tragic circumstances, but it’s vital your business is prepared for any eventuality.
By investing in shareholder protection insurance you can be reassured that if the worst does happen, your company has the financial resources available to fund the purchase of shares of a deceased shareholder’s estate.
It also provides the reassurance the shareholder’s estate wants that they’ll be getting a fair market value for any shares they decide to sell.