Your business is vital to your financial well being. From it you derive your income and your shareholding has a value which has been built up over many years hard work. Therefore you need to ensure your business is prepared for the unexpected. The death or serious illness of a shareholder can have major repercussions for the future of any business. Consider the following:
- Statistics show that 72% of businesses ceased trading within 5 years of the death of the founder of a business (Source: BDO Simpson Xavier).
- In a business with 4 partners, the probability of at least one partner dying before age 65 is 66% (Source: LIA)
- In 2008 one in five claimants under Business Assurance policies with New Ireland were aged 39 or under.
Shareholder Protection Plan
On death a shareholder's shares normally pass to their next of kin. This often leads to problems as the next of kin may not have the ability or want to become involved in the business. Therefore, they may wish to sell their shares as soon as possible. The remaining shareholders also may not want to work with a new shareholder.
Therefore, typically they would have to raise monies personally (not through the business) to buy back the shares from the next of kin. Would they be able to raise this money? What if they don't want to take on the additional borrowings? Both parties and ultimately the business are exposed in this situation and a fair and positive outcome is highly uncertain.
The solution is to put in place Share Purchase Insurance to ensure a plan exists and more importantly that the necessary funds will be available. The structure of the business will determine whether Corporate Co-Directors, Co-Directors or Partnership Insurance should be put in place.
Unlike Share Purchase Insurance which is designed to protect the shareholders, Keyman Insurance is designed to protect the business. The future success of every business depends on a few 'key' people. Losing a key person unexpectedly through death or serious illness would mean the business having to survive without that person's unique skills, contacts and management ability. Loans may be called in, sales may drop and inevitably the business will be under very significant pressure.
A Keyman policy pays a lump sum to the business to help it cope financially (albeit temporarily) with the loss of the keyperson. The lump sum might be used to temporarily replace lost profits, to recruit a suitable replacement or even just to repay loans.