Think shareholder protection is a waste of money for your business? Think again

Small businesses in the UK account for three fifths of all the country’s employment and about half the turnover of the entire private sector, according to the Federation of Small Businesses.

The UK SME market is a vital part of the economy. But it’s also one of the most volatile.

Roughly one in five small businesses fail to make it past the first year. About 60% fail to get past the three year mark according to some studies.

While there’s a whole host of reasons small businesses fail, most come down to planning failures in the early days, and that includes what will happen to the business if a shareholder dies or becomes critically ill.

About half of all businesses in the UK say they are unprepared for the sudden death or illness of a shareholder, according to a study by Legal and General.

Around a third of businesses, including small businesses, would want to buy back outgoing shares but don’t think they have the finances available.

You might think that shareholder protection is something reserved for large multinational corporations with dozens of shareholders and millions of pounds of turnover.

But in reality, it’s small businesses that can benefit more from having shareholder protection in place, and small businesses that can face harsher consequences if they don’t.

Here’s why.

Small businesses are less likely to have savings and capital

If a shareholder dies or becomes suddenly ill, your business needs to have the funds at hand to buy back those outgoing shares.

Without the funds there’s a bigger chance the shares will land with a third party who will be able to do whatever they want to with those shares, with very little you could do about it.

This could be anything from a family member wanting to get involved in the business despite having no expertise or value to the company.

Or, worse, the deceased shareholder’s estate deciding to sell the shares to someone else - potentially a competitor.

Many small businesses are cash poor, especially in the early days and you’re unlikely to have the available capital or savings available to take out of the business to buy shares.

Even if you do have the savings or capital to hand, how much risk will the business be in by losing its safety net in one go?

Instead, shareholder protection would guarantee that you have the funds available to quickly and easily buy back any shares following the illness or death of a shareholder so the business can continue to operate without putting its financial future at risk.

It’s harder to get a bank loan as a small business

Another way you can fund a buy back of shares is to secure a bank loan to cover the cost.

The problem is, banks are often reluctant to lend money to businesses for the purpose of buying shares back from a deceased or critically ill shareholder.

The reason is pretty simple.

It’s because you’ll be facing a period of serious uncertainty with the removal of a key part of the business, and banks won’t want to lend money to a business that might not be able to pay it back.

This is particularly true of small businesses, which are less likely to make it through the loss of a key shareholder than a larger, more established business.

The death or illness of a shareholder is more disruptive to a small business

Many small businesses are run by one, two or maybe three people.

Those few people make up the spine of the company and are responsible for its well being and growth.

In a small business environment, the decisions of those people will determine the success or failure of the business.

So if one of these shareholders dies or becomes critically ill and can’t continue, it will create more uncertainty and disruption than it may do at a larger company with more shareholders splitting responsibility.

In what will already be a tough and emotional time, the last thing you need as a small business is a dispute over what happens to an outgoing shareholder’s shares in the company.

Nor do you want to be scrambling around to find money to buy shares back.

With shareholder protection in place, you’ll at least have the reassurance that funds will be quickly available in the worst case scenario to help you retain those outgoing shares and minimise business disruption as much as possible.

Shareholder protection is more important for a small business

However you look at it, shareholder protection is - if anything - more important for a small business to help it navigate through a period of unforeseen disruption and tragedy.

The advantages a larger company will have for business continuity, like more funds and capital, a larger team and more processes in place, won’t exist for a small business.

If the worst happens, you want the reassurance and peace of mind that as bad as the situation is in the event of a shareholder’s death or critical illness, you do have a plan in place to retain shares quickly and minimise business disruption as much as you can.

With Shareholder Protection you’ll have those funds ready if you need them.

And it’s not just the business and its future that will have peace of mind.

It also provides some assurance to the shareholders’ family that they’ll receive fair value for the shares they’re selling back to you - which wouldn’t be guaranteed if they tried to sell them to a third party.

If you want more information about setting up Shareholder Protection for your small business get in touch and one of our advisors can talk you through what policies and plans are best for you based on your current circumstance.