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What can happen when a family business faces uncertainty

Once upon a time a brother and sister started a business
They did it at last! Julia and Julian set up a business together, a brother and sister partnership – something they’ve always dreamed of. HQ was their family kitchen table, creating their products to sell in local shops. Cash is tight and loans have been taken out to pay for raw materials and equipment. Marketing has been done by word of mouth and social media.

Two years in, and things are starting to take off. Word has spread and outlets in other cities are taking orders and new ranges are being developed. There have been some hiccups along the way, a couple blind alleys and a few false starts, but they’ve ironed out those issues, knowing that if you’re going to succeed, you learn from the hiccups and improve along the way.

A few more years in and the team has expanded to six people and they’ve moved to new premises, having outgrown the kitchen. Despite this rapid growth, they maintain customer service levels – the key to success.

But then the unexpected happens
Out of the blue, Julian suffers a fatal heart-attack. As he had a mortgage, he had life cover to protect his home for the family. But no one expected him to die so young – and so didn’t think about what might happen to the business. His wife inherits his estate which includes his shares in the business, however she has no time or interest in being involved in the running of the business,

Whilst she is happy to sell her shares, Julia doesn’t have the funds to purchase them.

What happens next?
Without the cash to purchase Julian’s shares, Julia is facing a crisis which could have significant implications for the future of the business.

Competitors will be keen to muscle in and there’s a risk that a cash incentive could see shares pass to an unwanted new partner – or a takeover by a larger business.

How shareholder protection could change the outcome for the business
Put simply, shareholder protection can protect the future ownership of the business if something happens to one of the owners.

Shareholder protection is a life insurance policy that allows surviving business owners to buy the deceased owner’s shares from the deceased’s estate. This means that the deceased owner’s dependants have a ready and willing buyer for shares.

Critical illness cover can be included as well. For example, if a business owner is diagnosed with cancer or suffers a stroke, the policy would pay the lump sum at that time, subject to the specific condition being covered.

Why is shareholder protection insurance important?
Families/beneficiaries may decide to take over the duties and responsibilities of their deceased relative. If this were to occur, it is possible that the business would suddenly have to deal with an inexperienced or disinterested person performing a key role.

If the family/beneficiaries decide to sell the shares to a third party, it could result in the remaining shareholders or partners losing control of the organisation as a whole.

What if this happened to your business?

  • Would you want your family to receive cash value for your shares in the event of your death?
  • How would you keep control of your business if something happened to one of your partners?

If Julia and Julian had the right protection in place, despite the tragedy, Julia could buy back the shares and continue running the business. Smart business owners recognise that, in order to ensure the future success of their business, careful and strategic planning is critical.

Not only can it minimise the impact brought about by the loss of people that your business relies upon, but it can also make sure the business remains in the right hands in the event of death or serious illness of a business owner and / or key employee.

Talk to us to review your business protection arrangements and build resilience for whatever the future brings.