Protecting your business in the event of your death can take various directions, dependent on the set up of the business and what you want to happen.
Let’s start exploring this in more detail…
If you are the sole business owner/shareholder you need to evaluate just how attractive your business would be if you were no longer part of it.
It is very common for companies with one director to be very reliant on that person. It’s the person customers have bought into and they don’t want to work with anybody else.
What should you consider in that case?
- Create a succession plan as soon as you can – so customers see your successor as a very credible alternative to you, somebody they want to work with
- Grow your team – if you can make the business more than just you, again that spreads the risk. It also makes your company a more attractive investment for a potential sale in the future
- Sell early – consider merging with another business or selling your company, while you are still working. You can then manage your exit strategy. That may not be an option, but if it is, it means you have some control and can provide additional income for your loved ones, rather than leaving it for them to tackle.
- Life insurance – you should ensure you have the right protection in place to insure against the impact of your death. We would always recommend this is set up to be paid into a Trust, meaning it will be outside of your estate, and protected from inheritance tax.
In the event of doing nothing, your partner or beneficiaries will be left to handle the business at a time when they are already feeling very vulnerable. It’s very common at that point for the business to be the victim of a “fire sale” – in other words, sold for way below the perceived value. Some businesses don’t sell at all – meaning all your hard work to protect your family has gone.
For companies with multiple shareholders you should consider the following protection:
- Partnership/Shareholders agreement – this documents what happens to the shares in the event of the death of any of the shareholding director(s)/equity partner(s), or any of them being diagnosed with a serious illness. It may not be appropriate for your beneficiaries to inherit the shares/equity and become shareholders/equity partners, as they may have limited expertise in your business – so the agreement helps to protect the business and the interests of all parties.
- Double option or Cross option agreement is when the remaining shareholding directors can elect to purchase the shares from the beneficiaries and the beneficiaries will have to sell to them, and likewise if the beneficiaries decide that they want to sell the shares then the directors will have to buy them – but not a third party.
- Business Will – in addition to a standard Will to cover your assets and protect your family, you may wish to consider a Business Will. The executors you choose to preside over your personal affairs may not be appropriate for your business dealings, so you can allocate different executors for the company. You can also set up a Trust, so in the event of your death the business remains trading and your beneficiaries benefit from some assets, with reduced risk of inheritance tax.
- Alternatively, you can ensure that there is a clause covering your shares of the business in your Will to safeguard the value of the shares on your death and therefore the value does not form part of your estate for inheritance tax.
- Shareholder protection – this is where life insurance policies are written on each shareholder’s life to provide for the untimely death of a shareholder. In the event of a shareholder being diagnosed with a terminal illness (dying within 12 months of diagnosis) or passing away, the policy will payout and provide the remaining shareholders with the funds to purchase the shares from the estate of the terminally Ill or deceased shareholder.
This is a very complex element of the law, and it is vital that it is set up correctly.
There are different structures recommended dependent on whether the business is a limited company or LLP/partnership.
For example, without a Partnership agreement in place, the business may be forced to cease trading and be dissolved in the event of the death of one of the partners.
There are additional business benefits to setting up these agreements, protecting you and your fellow directors/partners in the event of various business events, so please ensure you seek professional advice before doing this.
If you would like to learn more about how we can help you to protect your business, please contact us on 01344 875 310.