1. What Is Shareholder Protection?
A Shareholder Protection policy is an insurance arrangement ensuring that if a business partner passes away or becomes critically ill, the surviving shareholders have the funds to buy their shares.
Key question: Could you afford to buy out a business partner’s share without financial strain?
2. Why Is It Crucial?
- If no planning has been done, if a business partner were to pass away, it could create significant consequences for the ownership and control of your business.
- Without protection, ownership may pass to heirs who may lack expertise or interest in the business.
- Prevents financial instability if you need to purchase a deceased shareholder’s shares.
3. How Does It Work?
- Each shareholder takes out a policy, typically covering their share of the business value.
- In the event of death or critical illness, the policy pays out to the surviving shareholders, allowing them to purchase the shares.
- The deceased shareholder’s beneficiaries receive a significant lump sum payment in exchange for the shares.
4. Benefits of Shareholder Protection
- Ensures business continuity and a clean break for all.
- Keeps ownership within the remaining shareholders.
- Protects the business value and prevents forced sales to unqualified heirs or external parties.
- Provides financial security for all of the business partners.
- Avoids financial strain when buying shares at short notice.
- Provides a lump sum payment to your beneficiaries.
Next Steps
- Calculate the value of your business and determine the coverage needed.
- Consider speaking to a specialist Solicitor to review your Shareholder Agreement.
- Consider speaking to a Financial Planner to review your insurance policies, including life cover/Shareholder Protection.
About the author
Adam Downes is the founder of Pura Vida Financial Planning. As a Chartered Financial Planner, he specialises in helping business owners achieve financial security and freedom.
You can find out more about Adam at www.puravidafp.com/adamdownes
