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Recent research by Legal and General reveals that many business owners don’t fully appreciate the consequences of the death of a shareholder or a partner and the potential impacts this could have on their business.
The case study below hopefully helps to illustrate the problems that a lack of protection can create. This isn’t a real company, but most business owners should be able to identify with the circumstances which are relatively common amongst enterprises of all sizes.
The company, Widgets Limited, manufactures metal fastenings. It has been established for a number of years, has a full order book, employs ten staff, is solvent and generates good profits.
The business was established by three former business colleagues, Tom, Dick and Harriet, each injecting capital to establish the company. Premises, vehicles and plant & machinery have been part financed by retained profits, bank borrowing and lease arrangements. The company has standard Memorandum and Articles of Association and has no formal shareholder agreement in place beyond this.
The company’s accounts reveal that market value of the business is circa £1 million and each of the directors owns a third share. The directors all perform key roles in the business:-
Tom is Operations Director and his responsibilities include management of staff, finances and resources.
Dick is Manufacturing Director and he runs the shop floor and manufacturing process.
Harriet is Sales Director and she develops contacts with new customers and maintains relationships with existing customers.
Sadly, on the way to an appointment, Harriet was involved in a road traffic accident and didn’t survive, so what problems does this create for her co-directors beyond her obvious loss?
Let’s take a look at their options. Can they buy back the shares from Harriet’s widower (who is now legally entitled to them)? Will he sell or decide to become involved in the business? Does he have the necessary skill set to step into the business? What if relations aren’t good and he decides to sell to a competitor?
Harriet’s shares are worth £333,000 (a third share of £1 million), so how do the other directors raise this amount in cash? Will their bankers finance it bearing in mind the order book and customer relationships could now be in jeopardy? Do they have the necessary resources? And what about the director’s loan account, which now must be repaid?
With a properly drawn up shareholder agreement and supporting protection policies written under an appropriate trust, nightmare scenarios like the one described above can be largely mitigated.
Paradoxically, most businesses large and small, arrange numerous insurances to cover premises, stock, vehicles, plant and machinery and public liability, yet far too few arrange cover for what could amount to be the biggest threat their business could face.
Tax efficient, cost effective solutions can be arranged to provide complete peace of mind should the worst arise and talking this through with a professional adviser is probably best way to meet the specific needs of your business.
If you run a business and the above scenario strikes a chord please get in touch with one of our Financial Planning Consultants.
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