The vast majority of small and medium sized businesses in Ireland are family run, with more than one family member involved in the running of the business. These businesses are reliant on the family members to lead the growth of the business.
One concern for family businesses is to ensure business assets are transferred in a tax efficient fashion to the next generation. Planning for this transfer should commence as soon as it is recognised that the members of the next generation of the family, have chosen to lead the business into the future.
Another key concern for family run companies is ensuring that the business is kept within family control. If the premature death occurs of one of the family owner directors, the surviving spouse or children may not be ready, willing or able, to assume a leadership role in the business, there is then a risk of sale of the inherited shares in the company to a third party. The last thing the other owner directors will want is a third party purchasing a minority or controlling interest of the company. In some cases, the third party maybe a competitor to the family business.
The company directors would like to think they would have the cash reserves to buy out the inherited stake in the company, but this may not be available and the directors could be outbid for the deceased director’s stake.
Depending on the type of business structure and depending on the individual ownership setup, a number of solutions can be put in place to ensure that the business continues to operate successfully after the premature death (or the diagnosis of a specified illness) of a director, shareholder or key person.
Corporate Shareholder Agreement
A corporate shareholder agreement is an arrangement between a private trading company and one or more of its shareholders, which allows for shares to be bought back by the company when a shareholder dies. It is also possible for the company to buy back the shares of a critically ill shareholder. This type of agreement is usually backed up by a life assurance policy covering each of the shareholders covered under the agreement.
Similar to the corporate shareholder insurance, however instead of the company taking out the policy, the directors take out life policies on their own lives. The cover may also include specified illness cover.
Key Person Insurance
As the name implies, key person insurance is life assurance taken out by a business to protect it against the risks associated with one of its key personnel dying prematurely, or contracting a specified serious illness. The Key person policy will pay out a lump sum when the person assured dies or is diagnosed with a specified illness. The lump sum compensates the business for the impact losing a key person from the business.