Running a care business with a partner often means sharing responsibilities, making important decisions together and working towards a common goal. But have you ever considered what would happen to the business if one of you suddenly died?
For care home owners, domiciliary care providers and other care businesses with multiple shareholders, the death of a business partner can create significant uncertainty.
Who would inherit their shares? Would you be able to buy them? And what could this mean for the future of the business?
These are difficult questions, but answering them before something happens can help protect the business you've worked hard to build.
When a shareholder dies, their shares do not automatically transfer to the surviving business partner.
What happens depends on the company's articles of association, any shareholder agreements, the deceased shareholder's estate arrangements and other relevant legal considerations.
In some circumstances, the shares may pass to the deceased shareholder's estate or beneficiaries.
This could leave the surviving business owner facing an unfamiliar situation, particularly if the beneficiaries have little experience of running a care business.
For example, imagine two business partners who each own 50% of a care home.
One unexpectedly dies.
The surviving partner may wish to continue running the business, but the deceased partner's shares form part of their estate. Depending on the legal arrangements, the family may inherit an interest in the business or become involved in decisions about what happens next.
The surviving shareholder may want to purchase those shares, but where would the money come from?
Without suitable arrangements in place, this situation can create financial pressure, uncertainty over ownership and potentially difficult conversations at an already challenging time.
Shareholder Protection is a form of business protection designed to help business owners plan for the death of a shareholder and, where appropriate critical illness cover has been selected, diagnosis of a specified critical illness meeting the policy definition.
Typically, it combines appropriate insurance policies with legal agreements that establish how shares may be transferred or purchased following an insured event.
Depending on how the arrangements are structured, insurance proceeds may provide funds to help the surviving shareholders purchase the deceased shareholder's interest in the business.
The objective is to help create a clearer route forward for both the remaining business owners and the deceased shareholder's beneficiaries.
Care businesses face particular challenges when ownership or leadership changes unexpectedly.
Alongside the financial implications, owners must consider the continued delivery of care, employee confidence, relationships with commissioners and the responsibilities associated with operating a regulated service.
An unexpected change in ownership can raise questions about the future direction of the organisation.
For example, the surviving owner may need to consider:
Shareholder Protection can form an important part of a wider business continuity and succession strategy, helping owners prepare for potential financial consequences.
It does not replace the need for appropriate legal agreements, operational planning or regulatory considerations.
Although arrangements vary, the process generally involves three important elements.
Shareholders consider the value of their interests and how much funding might be needed if one shareholder died.
This can involve a professional business valuation, particularly where a care business owns property, operates multiple services or has a complex ownership structure.
Regular reviews are important because the value of a care business can change over time.
Insurance policies may be arranged to provide a benefit following death or diagnosis of a specified critical illness, where applicable, subject to the policy definitions, terms, conditions and exclusions.
The amount and structure of cover will depend on the ownership arrangements, financial circumstances and objectives of the shareholders.
Appropriate legal documentation can establish how the shares may be purchased or transferred.
These agreements need to work alongside the company's articles of association and existing shareholder arrangements.
Financial and legal advisers should work together to ensure the arrangements are suitable.
Shareholder Protection arrangements will often include an appropriate option agreement, sometimes referred to as a cross-option agreement.
Following the death of a shareholder, this may give the surviving shareholders the option to purchase the deceased shareholder's shares and the deceased shareholder's estate the corresponding option to require the surviving shareholders to buy them.
This provides a mechanism through which the shares can potentially be purchased using the proceeds of an appropriate insurance policy.
Importantly, an option agreement does not necessarily create an automatic obligation for both parties to buy and sell shares immediately following a death.
The precise form of agreement depends on the circumstances and should be prepared by an appropriately qualified legal adviser. It also needs to be considered alongside the company's articles of association and any existing shareholder agreement.
There is no single structure that is suitable for every company.
Depending on the circumstances, arrangements may potentially be established on an own-life basis, life-of-another basis or, in suitable cases, through company-owned policies and a company purchase of shares.
Each approach can have different legal, tax and practical consequences.
The appropriate structure will depend on matters including the company's ownership, number of shareholders, articles of association, shareholder agreements and the objectives of the owners.
This is why Shareholder Protection should be considered as part of a wider business and succession planning discussion, rather than simply purchasing an insurance policy.
The value of Shareholder Protection becomes clearer when considering what could happen following the death of a business partner.
A shareholder dies and their shares form part of their estate.
The surviving shareholder wants to purchase those shares but must find the money to do so.
Without sufficient funds or suitable legal arrangements, the business could face uncertainty over its ownership and future direction.
A shareholder dies and their shares form part of their estate.
An appropriate insurance policy provides funds following a valid claim.
Legal arrangements provide a mechanism through which those funds can be used to facilitate the purchase of the shares.
The surviving shareholders may then be able to continue operating the business under an agreed ownership structure, while the deceased shareholder's estate receives payment for the shares.
The outcome will depend on the specific insurance and legal arrangements in place.
The tax treatment of Shareholder Protection requires careful consideration.
In particular, legal agreements concerning the future sale or purchase of shares can have inheritance tax implications.
This is especially relevant where shareholders are considering how their arrangements interact with inheritance tax reliefs and wider estate planning.
Appropriate tax and legal advice should therefore be obtained when establishing the arrangement.
The aim is to ensure that the insurance policies and legal agreements work together without creating unintended consequences.
Without a suitable plan, the surviving business owner may need to find alternative funding to purchase their deceased partner's shares.
Possible options could include using personal savings, obtaining finance or negotiating payment arrangements with the deceased shareholder's estate.
None of these options is guaranteed to be available or affordable.
There may also be uncertainty about whether the beneficiaries wish to retain or sell their interest in the company.
For care businesses, where continuity, leadership and financial stability are especially important, unresolved ownership issues can add further pressure.
Planning ahead may help reduce some of these risks.
No. Shareholder Protection can be relevant to businesses of different sizes, including independently owned care homes, family businesses and larger care groups.
In fact, smaller businesses with two or three shareholders may be particularly exposed if ownership arrangements have never been formally reviewed.
The need for protection depends less on the size of the business and more on its ownership structure, financial resources and the potential consequences of losing a shareholder.
Shareholder Protection should be reviewed regularly and whenever significant changes occur within the business.
These might include:
A useful starting point is to have an open conversation with your fellow shareholders.
Consider three questions:
If the answers are unclear, it may be time to review your position.
An appropriately qualified financial adviser can help explain the protection options available, working alongside legal advisers where necessary.
Building a successful care business takes years of commitment, investment and hard work.
Protecting its future means considering what could happen if one of the people responsible for that success were suddenly no longer there.
Shareholder Protection is not about expecting the worst. It is about having a plan that considers the interests of the business, the surviving shareholders and the families involved.
Protect the people who depend on you. Protect your fellow shareholders. Protect the future of your business.
If you own a care business with one or more shareholders and have never reviewed what would happen if a business partner died, now could be a good time to start the conversation.
Through Quality Care Group Business Solutions, in association with Global WealthMAP, we can introduce you to Andrew Crossman, who can explain the Shareholder Protection options that may be appropriate for your business.
Quality Care Group facilitates the introduction, while regulated financial advice is provided by Global WealthMAP.
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This article is for general information only and does not constitute financial, legal or tax advice. The suitability of any shareholder or business protection arrangement will depend on the circumstances of the shareholders and the business, including its ownership structure, objectives and existing legal agreements.
Tax treatment depends on individual circumstances and may be subject to change. The legal and tax consequences of shareholder protection arrangements, including any agreements concerning the purchase or transfer of shares, should be considered with appropriately qualified legal and tax advisers.
Business protection policies are subject to eligibility and underwriting and to the relevant insurer's policy definitions, terms, conditions and exclusions. Critical illness cover, where selected, will only provide a benefit where the relevant policy definition is met.
To discuss the shareholder protection options that may be appropriate for your business, contact Andrew Crossman at Global WealthMAP.
Global WealthMAP is authorised and regulated by the Financial Conduct Authority. FCA registration number 827170.
