Surrey-based accountancy firm TWP is urging business owners to review their shareholder arrangements following growing concern over the financial risks of losing a key shareholder.

Many small and medium-sized companies are seemingly unaware of what happens to shares if one of the owners dies or becomes seriously ill.

Without the right protection in place, shares may pass to family members or other unintended parties, leading to disputes or instability.

Paul Hawksley, Partner at TWP, said: “We regularly come across businesses that have never addressed this issue or think they’re protected when, in fact, key documents or insurance policies are missing or out of date.

“Often when shareholders die, their shares of the company will automatically pass to family members, typically their spouse or children, if the business does not have Shareholder Protection.

“That can lead to all kinds of issues, from disruption to the business to disagreements over ownership or value.”

Sometimes the remaining shareholders do not have the funds to buy the shares, which could put control of the company in jeopardy.

“We’ve seen cases where family members were suddenly involved in a business they knew nothing about, while the remaining directors had no clear way to buy those shares back, which isn’t a good outcome for either party involved.”

One of the most effective ways to avoid this is by setting up a Shareholder Protection arrangement.

This type of policy pays out upon the death or serious illness of a shareholder, allowing the remaining owners to use the funds to purchase the deceased’s shares and retain control.

However, many companies either do not have this in place or have not reviewed it in years.

“We often find shareholder agreements that are completely out of date, or no longer reflect the current ownership or value of the business,” Paul added.

“Even where a policy exists, it might not be enough to cover the current value of the shares, or it might have lapsed altogether.

“The majority of us take out insurance on our cars, our homes, even our holidays, so why wouldn’t you want to make sure your business, possibly one of your most valuable assets, is protected too?”

TWP is encouraging company directors to carry out a review as part of their wider business protection planning.

“I get that it’s not a conversation most people enjoy, but avoiding it doesn’t make the risk go away. It just means you’re less prepared if the worst happens.

“You could risk losing control of your company or, in extreme cases, even having to dissolve it entirely, all because you chose to avoid the uncomfortable topic of death.”

With the right structure in place, you can protect the future of the business and everyone involved.

To arrange a review of your business protection arrangements, contact TWP on 01932 704700.