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Don't lose control of your business
Shareholder risk – are you exposed?
Here is a true story that will sending you warning bells……
There were two 50% shareholders of a privately-held company. They had taken out life insurance cover on each other, owned by the other shareholder. Unfortunately one shareholder died from cancer. $500,000 is paid to the surviving shareholder as owner of the life policy.
The widower is not paid...
As there was no share purchase or buy sell agreement, the surviving shareholder decided to keep the $500,000 and the deceased’s grieving widow received nothing.
Although technically she is now a 50% shareholder, the business is in disarray and its value substantially diminished. She has received nothing for her deceased husband’s share of the business.
The main purpose of a share purchase or buy sell agreement is to ensure that the insurance payout is used as intended, in other words, to give the surviving shareholder 100% control of the company and to give the deceased’s shareholders family their share of the value of the business in cash.
Questions:
If your business partner died or became seriously disabled, do you have a contingency plan to cater for an ownership change? Having a constitution and shareholder agreement are prudent measures, but unlikely to be sufficient without some correctly owned funding (insurance) and the right accompanying documentation.
Would you have the funds to buy a shareholder out, or would you be prepared to sell or mortgage personal assets to do this?
Would it be satisfactory to be in business with your former business partner’s widow? Would you continue to pay them dividends?
Minority shareholdings in particular can be difficult to sell for fair value; remaining a passive shareholder may not be satisfactory if the surviving shareholders control dividend policy.
Conclusion
A shareholder protection plan provides two major benefits – the surviving parties retain control of the business, and the departing shareholder or their family receive their share of the value of the business in cash.
This article is presented by Stephen Dunn, a financial planning expert, and an affiliate partner of PBS. Stephen is the principal of Dunn & Partners Ltd, a specialist business risk and employee benefits advisory company associated with Crest Financial Brokers Ltd.
Telephone: 04 978 7474
Email: stephen.dunn@crestbrokers.co.nz
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