Posted On: 2nd August 2012
Discussing any issues involving the shareholdings in a small to medium sized business, is to begin a journey into an emotive and sensitive subject.
The shareholders may be husband and wife, father and son, the whole family running the firm, even old friends and business associates. Either way, when discussing the ownership of any business you are indeed uncovering the very fabric of the firm in question - its purpose, its aspirations and sometimes even its failings.
Every small to medium sized Company has a potential problem here, with a need to provide a contingency plan. How do the survivors cover the cost of purchasing shares from a deceased shareholders estate, in the event of one of its shareholders dying unexpectedly?” On the death of a shareholder the following problems would have to be faced:
• Do the remaining shareholders/Directors give the deceased’s wife/husband/beneficiary, a lump sum for the shares? Can they afford to do that? How would they raise the money to pay a fair price?
• Will the Bank still support the business if a key driver behind its success is no longer there? They could withdraw facilities, or refuse to support the finance needed for the remaining shareholders to buy the shares of the deceased.
• Would it be profitable or feasible for the remaining Directors/shareholders to make the wife/husband/beneficiary a Director, and pay him/her a salary?
• Should a salary be paid if their services are not required in the running of the business? If so, given the fact that he/she is not contributing to the workload, how long should this go on for? Can a Company in today’s climate afford this? Will those who are now picking up the tasks of the deceased, as well as their own workload, be prepared to tolerate this?
• In the case of a minority shareholder the remaining Directors/shareholders need not do anything at all. Where does this leave the beneficiary? As far as the deceased shareholder is concerned, his/her estate would inherit nothing unless the Company was sold or larger dividends paid out on a regular basis.
• Should a majority shareholder die, the Company could come under the control of a beneficiary who has little or no knowledge of the business. This individual could do whatever he/she wanted, perhaps to the detriment of the Company - they could even sell the Company to a competitor! In most cases it is unlikely the shares will have the same value, as the majority shareholder, who is usually the driving force behind the Company, is no longer around. Clearly every business is different and circumstances change over time, therefore it is vitally important to have a contingency plan, then keep it reviewed and up to date.
There are relatively straightforward ways of addressing these problems in a fair and dignified manner and once dealt with, the shareholders can get on with making a profitable business, with peace of mind.
For a free, no obligation discussion on this or any Financial Planning subject, please call David free on 0333 800 1808. Crombies Financial Services limited are Appointed Representatives of Newell Palmer Group Limited, who are Authorised and Regulated by the Financial Services Authority.