Nest Egg: Protecting your company and your family
The Covid pandemic allowed many extremely busy people to step off the treadmill during lockdowns and spend more time with family than they might have had before March 2020.
The M50 and many other commuter routes practically emptied out as employees were told to work from home or stay within their county of 5km limit. Mealtime conversations occurred a lot more frequently among family members who might have previously been rushing out the door with their travel mugs and eating on the run etc.
Many ‘what if’ conversations also occurred in households as, unfortunately the rising death toll from Covid left many of us feeling more mortal than usual.
One area of financial concern for many where we found an increase in interest, was for family business owners who asked us what would happen to their business, or shareholding in their business, if they passed away suddenly. This is an area of massive neglect in Ireland where SME’s (small and medium-sized enterprises) number approximately 250,000, and typically do not make provisions for the eventuality of the sudden death of one of the business owners. I’ve been guilty of not taking my own medicine here until recently, but most business owners are usually so busy in the day-to-day activities of their own business they often rarely stop to plan ahead. It’s often a serious illness, or worse still a death of one of the directors or key personnel that triggers a reaction. Let’s look at how you can protect your own business and your family’s situation whether you are a sole trader or a company director of an SME.
Let’s look at a typical scenario that could easily happen to a thriving business and could quickly turn into a complete mess if no financial cover had been put in place beforehand.
Tom, Mary and Deirdre are in their mid-fifties and have run a successful business for the last seven years which the three of them founded together. They each own 33.33 per cent of the shares in the company. Each of the three of them are married but their spouses have nothing to do with the company, ABC Ltd. The business has been values at €1.5 million by their accountant and each of them feels they are in good health for their age. They have no business protection in place and have never had a conversation about what would happen if one of them died (this would be quite common).
Suppose Deirdre dies suddenly for whatever reason and there is now a panic as what to do regarding the overall shareholding of the company. Deirdre owned a third of the company and let’s say her husband, Sean does not get on particularly well with the other remaining directors, Tom and Mary. Sean is quite entitled to ask the company to pay him out €500,000 from the company bank account for Deirdre’s shares. If the company does not have a spare €500,000 sitting in the company bank account to buy back Deirdre’s shares from Sean, then they would have to take a loan out, or sell some assets to raise the cash. Sean could take the view that the value of the company is only going to go up from here and alternatively, say that he himself or his 21-year-old son now wishes to take Deirdre’s seat on the board and may or may not wish to work daily for the company. Can you see how messy this could come because there was no plan in place?
The solution is simple. A basic life policy could have been put in place for all three company director’s which would have paid out one third of the value of the company to buy back the deceased director’s shares in the event of his/her death. The company reserves pay the premiums on the policy and a simple shareholder’s agreement would have taken away any grey area or possibility of a messy dispute. The message is simple – plan ahead to avoid uncertainty to protect the business and your family’s interests.
For all your financial planning needs please contact Conor & the team at info@tarafinancial.ie or see www.tarafinancial.ie