Business Protection - A Case Study
Have you thought about how your business would be affected if one of the key stakeholders were to die?
It’s not a question we often ask or consider as many of us don’t like to dwell on a negative scenario. But it’s an important question that all businesses need to consider.
Let us explain using a case study
‘Important People Limited’ is a PR Firm with two directors who are also the sole shareholders. The two directors, Mr Important and Mrs People, own 50% of the firm each. The company is worth £1M.
For the following scenarios, we are going to assume that Mr Important dies.
Scenario A
In this scenario, the company has no Business Protection in place. Mr Important’s shares pass to his wife.
1. She could keep the shares
She may or may not want to get involved in the day to day running of the business. Either way, her presence, or lack of it, may be detrimental and cause management and operational issues in the running of the firm. As a major shareholder she would need to be consulted on most matters.
2. Mrs Important may not want to keep the shares
If this is the case she may offer to sell the shares to the company. If the company doesn’t have sufficient funds Mrs Important may not be able to sell the shares. Mrs Important’s quality of life would be significantly affected as she would receive no money from the Company as a result of her husband’s death and the income he provided would not be replaced.
3. Mrs Important might sell the share to a third party
This would enable her to ensure her financial security but could be bad news for the company. The new shareholder could be anyone, including a rival firm. They would most certainly want to be actively involved in the day to day running of the company.
Scenario B
In this scenario, the company has taken advice and has put in place appropriate Business Protection in the form of life insurance, a ‘cross option agreement’ and a shareholders agreement.
This results in the following:
1. The proceeds from the life insurance policy taken out by the company on Mr Important’s life are paid to the company. This amounts to £500,000, the full value of Mr Important’s shareholding.
2. Because a ‘cross option agreement’ and a shareholders agreement was put in place, the company is entitled to purchase the shares from Mrs Important, using the proceeds from the life insurance policy.
3. Mrs Important has secured her financial future with the proceeds from the sales of the shares.
4. The company has secured its future; Mrs People now has complete ownership of the company enabling her to control the running of the company.
How can Trethowans help?
We have produced this case study to illustrate the importance of taking the right advice and putting in place the right measures to ensure your business is protected.
We can help you review your business and put in place the appropriate agreements that are relevant to your business structure. We can work with your financial adviser to ensure that a full package of measures is in place that will completely secure your business should a key stakeholder die or not be able to continue in business for any reason.
This case study is one example of a scenario that could adversely affect your business. We have a team of experienced solicitors who have helped large and small businesses take the right steps to secure the future of their business.
Please get in touch to discuss your personal circumstances:
