What Happens to a Business When a Shareholder Dies?
When you build a business with someone else, you probably spend a lot of time talking about the things you want to achieve.
Growing the business
Winning new clients.
Employing more people.
Increasing revenue.
Building something valuable for the future.
But there is another conversation that can be just as important:
What happens to the business if one of the shareholders dies?
It's not an easy conversation to have. But when two or more people own a business together, understanding what could happen to the shares if one owner dies can help reduce uncertainty for everyone involved.
The shares don't simply disappear
A common assumption is that if a shareholder dies, their shares somehow stay with the business or automatically pass to the other shareholders.
It isn't necessarily that simple.
Shares are an asset owned by the shareholder. When that person dies, their shares generally form part of their estate.
What happens next can depend on the company's constitution, shareholders' agreement, estate arrangements and other legal considerations.
The deceased shareholder's family or beneficiaries may therefore become involved in decisions about an asset that could be one of the most valuable parts of the estate.
At the same time, the remaining shareholders may be faced with the possibility of having a new owner involved in the business.
That could be a family member who has never been involved in the business, or another beneficiary who has different expectations about what should happen to the shares.
Neither outcome is necessarily what anyone intended.
What might the family want?
Imagine three people own a business together.
One shareholder dies unexpectedly.
Their shares are now part of their estate.
The deceased shareholder's family may reasonably expect those shares to have significant financial value. They may want to retain them, sell them or understand what options are available.
Meanwhile, the remaining shareholders may want to continue running the business themselves.
They may not want a new shareholder who isn't involved in the business.
They may also need to find a way to fund the purchase of the deceased shareholder's shares if there is an agreement or desire for the remaining owners to buy them.
This is where things can become complicated.
The family may need financial value from the shares, while the remaining owners may need ownership certainty.
Both are legitimate needs.
Buying the shares is only part of the problem
Let's say the remaining shareholders want to buy the deceased shareholder's shares.
Where does the money come from?
If the shares are worth $1 million, the remaining owners may not have $1 million sitting in a bank account ready to purchase them.
Taking money out of the business may not be practical or appropriate.
Borrowing may be possible, but obtaining finance at short notice isn't guaranteed and may create additional financial pressure.
Without funding already considered, the ownership issue can become a financial problem at exactly the wrong time.
This is one of the reasons Shareholder Protection can be an important part of business planning.
What is Shareholder Protection?
Shareholder Protection is designed to help provide funding when a shareholder dies, subject to the structure of the arrangement and the relevant policy terms and conditions.
The intention can be to provide the remaining shareholders with funds that may help them purchase the deceased shareholder's shares, while providing value for the deceased shareholder's estate.
The exact structure matters.
The shareholders may need to agree on how the shares would be valued, who would have the right or obligation to purchase them, how ownership would be transferred and how the insurance is structured to provide the necessary funding.
Legal and accounting advice can also be important when establishing the overall arrangement.
The insurance is only one part of the plan.
The real objective is to have a plan for what happens to the ownership.
Why having a plan matters
Without an agreed plan, a shareholder's death can leave everyone trying to work out what happens next while also dealing with the personal impact of losing someone.
The remaining shareholders may be uncertain about ownership.
The deceased shareholder's family may be uncertain about the value of the shares and how they will be dealt with.
Employees may be wondering what happens to the business.
Clients and suppliers may have questions about the future.
And the business still needs to operate.
Having an agreed arrangement in place beforehand can provide clarity around what is intended to happen.
It doesn't make losing someone easier.
But it can remove some of the uncertainty surrounding the business.
What should shareholders think about?
If you own a business with other shareholders, it can be useful to ask some straightforward questions:
What happens to my shares if I die?
Who would own them?
Would my family want to retain the shares or receive their value?
Would the remaining shareholders want to buy them?
How would the purchase be funded?
How would the shares be valued?
Does our shareholders' agreement reflect what we actually want to happen?
Is there insurance in place to provide funding if needed?
When was the arrangement last reviewed?
The answers may highlight areas that haven't been considered.
And that's exactly why these conversations are easier to have before they're needed.
Ownership doesn't disappear
A business can feel very different when one of its owners is suddenly gone.
But the ownership doesn't simply disappear with the person.
Their shares remain an asset and may form part of their estate.
That means there are potentially two important interests to consider:
The remaining shareholders need clarity about who owns and controls the business.
The deceased shareholder's family needs clarity about the financial value of what has been left behind.
A well-considered Shareholder Protection arrangement can help address the funding side of that equation, while legal agreements and estate planning help establish what should happen.
Protecting what you've built
When you build a business with other people, you're building more than a source of income.
You're creating an asset that may have significant value for you, your fellow shareholders and your families.
It's worth considering what happens to that value if one of you is no longer there.
Not because you expect something to happen.
But because ownership doesn't disappear when someone dies.
Having a plan can help make sure everyone understands what happens next — and can give the business, the remaining shareholders and the deceased shareholder's family greater certainty at a difficult time.
If you own a business with other shareholders, it may be worth reviewing your shareholders' agreement, valuation arrangements and funding strategy to make sure they still reflect your intentions. At New Vision Financial Services, we can help you understand how Shareholder Protection may fit into a wider business protection strategy, working alongside your legal and accounting advisers where appropriate.
Amy Callon
Financial Adviser
New Vision Financial Services
Plan your future and let us help you have peace of mind along the way.