He adds: “For example, my business partner and I have insurance in place to buy the company shares from the deceased’s partner, and we have a loose agreement on how the company will be valued, depending on the viability of it trading after the death of one of the owners.
“Key man insurance will help to cover the costs of hiring a replacement, but there is still no guarantee that income, and therefore the value of the business, will not fall in the months and years after a death. So, we think it’s important to have an agreed buyout structure based on similar terms to a sale in the open market.
“But we do not want to put in place a legal agreement, as it may be in the best interests of the deceased family to retain the shares and wait for an exit of the full business at a later date, or just to continue to receive an income from the business. By discussing this with our families, we know what the rough plan would be, which would make it harder for the surviving business partner to pull the wool over the eyes of the deceased’s family – even though you would hope that would be unlikely.”
Business risks
The risk for many businesses where the shares are simply passed to a surviving spouse is that the spouse has the option to sell the shares to an external third party, which could result in a takeover of the business by a competitor. This could be bad news for the remaining management team.
Butcher says: “If an entrepreneur wanted to try and ensure the continuation of their business, they could look at an employee ownership model, such as an employee ownership trust.”
Patel, like Walford-Fitzgerald, recommends that businesses also consider a shareholders agreement to help regulate the relationship between the shareholders. This would confirm how the company is to be managed and would protect shareholders after the death of someone with a controlling interest.
He adds: “The agreement can also include pre-emption rights – which may be in the articles of the company too – and this pre-emption right may give the other shareholders the right to purchase a deceased person’s shareholding. Partnerships will often have succession rights built into a partnership deed addressing the same issues.”
No matter how an entrepreneur ultimately decides they want to pass on their business assets on death, they should take advice from their financial adviser, their accountant, and their solicitor to make sure the correct structure is in place to protect the family and the business from any unnecessary financial or tax liabilities that could arise.
