This week’s podcast is all about shareholder protection, with Craig Skelton and Michelle Costello. It follows on from episode 78 on business protection and episode 80 about relevant life plans.
What is shareholder protection?
Shareholder protection is very much like the other protections that we’ve talked about – it’s life insurance and critical illness cover under a different name. In this case it’s for businesses that have partnerships or shareholders.
If you’re not a director who solely owns your business, then shareholder protection is something that could be relevant to you and your business partners.
Why would a business need it?
If one of the shareholders were to pass away, then the standard process is that their shares would pass to their spouse or other beneficiaries.
If that beneficiary doesn’t know anything about the business, it can be a risk to the remaining shareholder(s). How will they maintain and run the business if the shares have effectively gone to a third party? By setting up shareholder protection you gain the finances you need for the business to buy those shares.
As a business owner, you want to maintain control of that business and the direction it’s going in. If something happens to the partner or another shareholder, you potentially lose control. Imagine you have a 50-50 split where both parties need to agree to any sort of change. When that second person is no longer there, how will you make those decisions?
Finding out who even owns these additional shares could even be complicated, especially if your business partner is unmarried.
What are the options if your business partner or shareholder passes away?
The main options are to continue to work with the new shareholder, or buy them out. But that’s not always possible. You may not have the funds you need. That’s why it’s important to have shareholder protection in place.
It would be very frustrating if you don’t have the funds. You might end up borrowing money or looking at other ways of raising capital to buy that person out, when shareholder protection would just look after you after that situation should the worst happen.
It’s a straightforward claims process. It’s a case of providing evidence that that person has passed away. Meanwhile, a bank may not be happy to loan you the funds needed. Your business will be in a volatile state, so how would the bank balance that risk?
How does it work if the shareholder becomes critically ill?
It’s like any sort of protection – it puts you in more control at a very stressful and upsetting time.
If your business partner is critically ill they won’t be able to run the business. Claiming on your shareholder protection gives you the ability to buy out that shareholder.
If it were me, I’d like to think that I could potentially be bought out of my business to allow me to step back. It could give me the funds to pay for private treatment to get well again and potentially get back into the business later on.
The policy gives you that peace of mind. You’re not worried about the business any more. You could retire and do what you want to do. It gives you options, especially when you won’t receive any sick pay because you’re self employed in your own business.
How else can shareholder protection help a business?
Depending on your level of protection, you might be able to do more than buy out the other shareholder. There could be funds to protect your profits and ensure that the business can still run.
You might look to cover the cost of losing the other person within the business. It could help cover the salary of someone new to take on that workload.
If your firm is a limited company with employees, losing one of the directors creates instability within the workforce. Instability can affect production and staff attendance. People might be concerned about the future of the company and look to leave.
In that case not only are you dealing with the loss of your partner, it could also be the loss of trusted staff. Protection can help keep those foundations strong.
How can I find out more about shareholder protection?
We’re here to help! Not very many advisors talk about business protection. So it’s important to reach out to a specialist who knows the products, the benefits and pros and cons. That way you are going to get the right plans in place for you and the firm.