Ensuring stability when a business loses a partner
The Secret Accountant explains why they firmly believe in the value of cross-option agreements to ensure business continuity.
The summer of 2016 has had many ups and downs…
a new prime minister
the reality of auto enrolment kicking in
the launch of a new website for our practice.
To top things off during all the above excitement, it has come to our attention that many clients – both existing and new – have not considered how to protect their business if a business partner dies.
It may not be a comfortable thought, but at some point a business may be confronted by the critical illness or death of one of its owners. Have you considered what might happen to your company if you were to die or became critically ill? Or indeed, if one of your fellow shareholding directors were to die, or have an accident or illness making them incapable of returning to work?
One way of protecting your business in the event of a shareholding director’s death or critical illness is for the shareholders to enter into cross-option agreements.
Many clients who are shareholders in their own business with other non-family member shareholders have not considered what will happen if any of them dies. The cross-option agreement provides the surviving shareholders with the option to buy the deceased business owner’s share of the business. In addition to the surviving shareholders being able to call their option to buy the shares, the legal representatives of the deceased’s estate also have the option to sell the shares of the deceased business owner to the remaining shareholders.
In either case, whether the remaining business owners want to buy the shares or the legal representatives want to sell, the agreement ensures the option is exercised. The cross-option agreement is set up in this manner to ensure there is no binding sale, ie in certain circumstances neither party could exercise their option, which means business property relief for inheritance tax purposes can be preserved.
In the process of setting up the appropriate business protection it should also involve setting up a cross option agreement with all the directors/partners in the business, enabling the remaining directors or partners to purchase the share of the business from the deceased’s estate.
As with most practices we have developed business relationships with solicitors and IFA’s so we feel between us we can offer the client a ‘one stop shop’ to fully explain how a cross option agreement could be useful to them.
So the next time you’re talking to a client I would recommend speaking to them about what shareholder protection they have in place.
The Secret Accountant is a practitioner based in the heart of England who comments on issues which affect many accountants.