What would happen to your business should you or one of the other shareholders in your company die? If the deceased shareholder owned 50% or more in the company, then their next of kin may become an equal or major shareholder. All key decisions going forward either stymied or taken away from you altogether. Did you know that 72% of businesses cease trading within 5 years of the death of the founder (Source; BDO Xavier Simpson). Failing to have adequate business insurance in place is one of the major reasons why!
Such an event can cause extreme difficulty for both the next of kin and the surviving shareholder/s.
* The next of kin may have no interest in the business!
* They may simply want to sell their shareholding, and don’t care who to!
* On the other hand, they may refuse to sell which could lead to a bleeding or eventual collapse of the business!
* Does the spouse, son or daughter stepping into the deceased’s shoes get on with the other shareholders?
* They may have little or no experience!
* Have they notions of moving the business forward, but in a completely different direction?
* Has the remaining shareholder/s the required capital to buy out the deceased’s shareholding?
* If not, but finance can be arranged, could the business afford the repayments?
There is a simple but very viable solution to this contentious problem. It comes in the form of Co-Directors or Corporate Co-Directors Insurance. Choosing which option is best for your company is dependent on a few key factors and your personal circumstances. A Certified Financial Planner is best placed to run through and discuss these with you. This in turn, determines the set-up and whether the cost is to be borne by the company or the shareholders.
Similar in a way to Partnership Insurance, a Buy/Sell Agreement is put in place. This agreement obligates the surviving Directors to buy the deceased’s shareholding at a fair open market value. It also obligates the next of kin to sell the shareholding back to the surviving directors. A more commonly used version of this agreement is the Double Option Agreement. With the double option, either party has the option to trigger the agreement. It gives the surviving directors the option to buy and it gives the next of kin the option to sell. The beauty of the Double Option agreement is in its flexibility. Where it suits, both parties can mutually agree not to exercise their options. In this instance, the next of kin retains their shareholding and steps into the business.
Corporate/Co-Director Insurance provides:
• A capital lump sum payment
• Peace of mind to all company directors.
• It ensures funds will be available to them on the death of one to buy back the shareholding of the deceased.
• It allows directors to maintain their ongoing control of the company.
• It ensures the next of kin are taken care of and provided for.
• Plans can also be set up to cover director’s becoming seriously ill.
In summary, corporate/co-director insurance protects the business, surviving director’s and any deceased director’s shareholding.
Does this situation apply to you, or could it? Would you be comfortable working with a co-director’s spouse, son or daughter? Would you like to protect your own family’s share of your business? Would you like to know how to structure corporate co-director’s insurance for your business or get an approximate guide of the cost?
Please share this blogpost if you think it has been informative or might benefit someone you know. As always, get in touch if you have any personal Financial Planning queries or would like to arrange your free Discovery Meeting consultation.
Paul is the Managing Director of Lifestyle Financial Planners Ltd. I’ve been in the Financial Planning business since 1985. Lifestyle Financial Planners offer specialist, tax-efficient wealth management, retirement and estate planning solutions to our clients. Paul is a Certified Financial Planner and holds a Masters Degree from UCD in Financial Services and Risk Management.
Tel: 096-75951 Mob: 086-8053755, www.lifestylefinancialplanners.ie
he information contained in this article is for general information only. It should not be used as the basis for any form of agreement or advice. We recommend readers seek separate tax and legal advice where necessary. This information is of a generic nature and does not take into account your own particular circumstances. Investment funds can fall as well as rise.
Lifestyle Financial Planners Ltd trading as Lifestyle Financial Planners is regulated by the Central Bank of Ireland