Your staff, ideas and plant/machinery may be important, but almost certainly the most valuable part of your business is you. Have you thought about the potential impact on your business if you were to die or become critically ill? More importantly, have you considered the impact on your family?
Does your business have a disaster recovery plan that includes plugging the financial gap left by the death or illness of senior staff? More importantly, if you are in business with someone else does your Shareholder or Partnership Agreement provide a clear mechanism on how to fairly deal with the deceased owner’s shares?
Have you or the business taken out loans or given personal guarantees that would need paying in the event of your death?
Is your family protected against the loss of income they will suffer in the event of your death or Critical Illness?
Are any Life Assurance arrangements you have set up arranged in the most tax efficient manner?
Whilst the value of plant and machinery, vehicles and property can be easy to determine, and to insure, the value of you to your business, or indeed the value of your business, can be less clear cut. Nonetheless, the most frequent business planning omission we come across is that there is often little consideration given to protecting the business from the loss or illness of the owners and senior management, and even more importantly to protect your families interest.
Your business can protect itself by effecting ‘Key Man’ cover which would pay a sum to the business to compensate for the loss of income that a key person would have provided, or to provide funds for hiring replacement staff. This would enable the business to remain afloat whilst the remaining shareholders, management or family can decide on a continued strategy. If there are other shareholders in your business they may well want to take control of your shares, but how does your family get paid for their inherited share of the business?
” If you were to die or become seriously ill, not having suitable Shareholder agreements and Life or Critical Illness policies will be disastrous for all of those around you, your business partners, your staff, but most importantly your family. “
If you were to die or become seriously ill, not having suitable Shareholder agreements and Life or Critical Illness policies will be disastrous for all of those around you, your business partners, your staff, but most importantly your family. We would propose that over and above any Key Man cover, the shareholders are insured for the fair value of their shares. The insurance policy will provide the funds in the event of a shareholder dying, but how can these be paid tax efficiently to the remaining business owners to enable them to buy the shares from the spouse so they can control the business as they wish going forwards?
We would ensure that all parties sign a ‘cross option’ agreement which obliges the surviving spouse to sell the inherited shares to the remaining shareholders and in turn the remaining shareholders to purchase the shares, funded by the pay out from the Life policy. Care needs to be taken with the wording of the agreements and ownership of the policies to mitigate any taxation consequences, and consideration also needs to be given to the arrangement complying with your Shareholders Agreements and your personal Wills and Estate Planning. If entering into any arrangement like this your legal advisers and accountants need to be aware to ensure no conflicting arrangements are made.
This information does not constitute an offer or advice and the service described may not be suitable for everyone. Alternative services may be offered if more suitable.