Find out how to work out the amount of shareholder protection you need in the worst case scenario
Taking out shareholder protection insurance can help provide some much needed reassurance about a company’s financial future in the event a shareholder dies or becomes too ill to continue in the business.
By providing a lump sum to the remaining shareholders, it allows them to quickly buy back the shares from the deceased or ill shareholder’s estate so they can retain control of the company, while also ensuring the estate receives a fair value for the shares.
Combined with a shareholder agreement, shareholder protection insurance is the best way to ensure a smooth transition of shares back into the company.
But one common question is how much shareholder protection do you need?
The amount of cover you’ll need is determined by two things:
The value of the company
The percentage of ownership the shareholder has in terms of shares
The calculations are best done between you and your accountant, or even an external auditor.
But to give you an idea of the level of cover you’ll need, here’s a few things to consider.
Calculating the value of a business
The level of shareholder protection you’ll need will be determined by the value of the company, and the percentage of shares the shareholder has in the company.
The value of a company could be calculated using a number of different factors including profit growth over a sustained period, the company’s market position or share, or the net asset value (the value of the assets the company owns).
For example, a typical way to judge a company’s value is to take a three or five year average of its pre-tax profits and use a multiplier to determine the value.
Once you’ve got this, the amount you’d insure would be the equivalent to the shareholder’s percentage shareholding.
So for example, if a company had an average net profit of £1,000,000 and a shareholder held 25% of the shares in a company, you’d cover them for £250,000 multiplied by the agreed multiplier - for example 7.
That means you’d need cover up to the value of £1,750,000 for that shareholder.
Why shareholder protection insurance is important
While you might have a shareholder agreement stating that any shares from a deceased or ill shareholder must be sold back to the business, it doesn’t guarantee the funds will be there when needed.
Without protection insurance, you’d either have to fund the purchase out of the company’s reserves, which could seriously deplete any emergency savings and put the business in jeopardy.
Or you’d have to fund the purchase out of personal savings, putting yours and your own family’s financing at risk.
Writing your shareholder protection into a trust
Whatever the level of cover you need for your shareholder protection, it’s always recommended that you consider writing your policy into a Trust, naming the other shareholders as the beneficiaries.
To do this each shareholder would take out an own life policy to cover themselves for the value of their shares.
They’d be responsible for the plan and paying the premiums every month.
In the event of their death, the Trust would pay out to the remaining shareholders so they can purchase the shares.
The shareholder agreement you take out alongside your protection insurance will dictate that the shareholders must use the funds to purchase the remaining shares.
Or, you could have this written into your articles of association - although it’s advisable to have a separate agreement that sits alongside your shareholder protection insurance.
Get your shareholder protection from Rigby Financial
If you’re thinking of safeguarding your business by taking out shareholder protection insurance, speak to us at Rigby Financial.
With our team of experts at your side you can find the right level of shareholder protection to keep your business covered for any eventuality.
We’ll make sure you have the right level of cover to fund any share purchases, at a monthly premium that doesn’t eat into your company profits.
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