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SMEs at risk if business owner dies

By June 20, 2017January 29th, 2021For Business

Only 26% of shareholders said that they would buy the shares left following the death of a fellow shareholder, with over half (51%) having to rely on their personal wealth to do this. Fewer than two in every five people (38%) had considered how a life policy could help. One in five (21%) said that they thought that their beneficiaries would inherit and become active in the business. A further 16% would simply look at selling their shares to a third party.
The survey of over 800 small and medium-sized businesses also found that just 41% of companies had a shareholders’ agreement, whilst only 32% and 40% respectively had reviewed their Articles of Association or Partnership Agreement within the last year. Worryingly, one-third (33%) had not reviewed their arrangements since their business started

Research by Legal & General shows that many UK business owners have no protection arrangements in case they, or a co-owner, dies.  Over half of Britain’s small business owners have not left any instructions in their Will or made any other arrangements to deal with their shares.  L&G’s report highlights the threat of business closure this lack of planning could bring about if an owner dies.You might assume that other shareholders will buy out your share, but the research shows that only 26% of shareholders would be prepared to do this. Even then, half of them would have to rely on their own resources to fund the purchase.Whatever the size of your organisation, you should have a crisis management plan to ensure the continuity of your business if an owner dies or becomes unable to make decisions.If a business owner loses the ability to make decisions a Business Lasting Power of Attorney can be used to protect their position and the business while they are alive.If a business owner dies, forward planning in their will, or under a shareholders agreement can clearly set out how the shares are to be passed on, or whether they are to be bought back by the company.  A shareholders agreement with the purchase funded by insurance is one route that can be used to retain control of the company, but L&G’s research showed that 36% of businesses worth over £5m had no share protection insurance in place, and a surprisingly low number of businesses with shareholders agreements in place.Without a shareholders agreement or a suitable will, control of the company might pass to people with no connection to the business.Taking time to sort out your business crisis management strategy could prevent your business from running into problems, or passing to unexpected owners if a business owner dies or loses capacity.

Chris Burrows

Author Chris Burrows

Chris is a Senior Solicitor and is head of the firm's Private Client department.

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