In this case study we will look at:
- The importance of having a clear plan for dealing with shares in a business in the event of death of a key shareholder
- How a shareholder agreement and life cover should interact to ensure the shares and capital end up with beneficiaries as intended
- The importance of working with an adviser who provides full financial planning and not just asset management.
Mr Fadden is a long-term client of ours who has a successful career in the public sector. He also runs a private sector consultancy company with his business partner which has been built up from scratch over a period of five years. He is 62 years old and lives in Surrey with his young twins aged 10, who are being privately educated. Mr Fadden is recently divorced.
The shares are owned 50% each between Mr Fadden and his business partner. The company makes a profit of circa £200,000 each year.
Whilst Mr Fadden and his business partner (aged 53) had solid personal financial plans already in place (complete with life cover), the business did not have insurance. This meant that if either party were to become ill or pass away, the business would suffer financially in two ways. First, from the direct loss of an earning shareholder. Second, the remaining founder would then be running the business full time and will therefore have less time to generate income.
Mr Fadden also wanted to make sure that his children would be well looked after if he died early. Without insurance, they would have to wait until their eighteenth birthday to be granted ownership of shares. Mr Fadden was keen that the value of his shares would be crystallised in cash for the benefit of the twins, if he died early.
• To make sure the business was able to survive if one shareholder died.
• To ensure a plan was in place to relieve loved ones from the pressure of inheriting a business.
• To make sure Mr Fadden and his business partners’ families would be well looked after in the event of eithers death.
• To ensure financial arrangements were in place to allow the surviving business partner to buy the shares from the deceased estate.
When we first brought these issues to the attention of Mr Fadden, it was clear that this was not something that he or his business partner had considered. Both parties were eager to agree a suitable arrangement, so we were able to work with a lawyer to draw up a shareholder agreement.
The agreement was based upon the valuation of the business (£1.35 million) to ensure the surviving partner has the right to buy the remaining shares from the deceased estate. We also put in place shareholder protection insurance for both partners with a sum assured of £517,500 each. These policies were both written in trust for the benefit to their business partner.
Given Mr Fadden’s age, it was important that both had renewable term policies, which allowed the policy to be extended after the initial five-year term period, without having to re-qualify for new coverage. We agreed that we would review the value of the business informally each year to ensure that the sum assured was still in line with the company value.
• Valuation of the business: £1.35 million
• Sum assured on two policies: £517,500
• Cost of protection insurance (Mr Fadden): £140 per month
• Cost of business partners’ protection insurance: £40 per month
• Cost of advice: £3,114 commission paid to First Wealth
This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.