A Cautionary Tale For All Business Owners

Mr. A and Mr.B were Directors and joint owners of a successful small business in the Home Counties, each having 50% of the ordinary share capital of the company. Their roles had little overlap with Mr.A primarily responsible for the technical back-up while Mr.B was much more sales oriented. Profits were sufficient for each to maintain a comfortable lifestyle with the vast majority of the money coming out of the company as dividends. Both were married but their respective spouses had no role within the business and, crucially, no interest in becoming involved.

One evening, Mr. A answered an unexpected call to be told that Mr.B had been involved in a car accident and had, unfortunately, died. With that, everything went from order to chaos.

Aside from the fact that the business had immediately lost its sales side and, as a result, a very significant proportion of its income, Mr. A had now gained a recently bereaved and disinterested co-Director since Mr. B had, in his Will, left “All to spouse”.

Mr. A quickly realised that he needed to find a replacement for Mr. B to pick up the sales side. To do so, he would ideally need an injection of capital to the business but their bank was unwilling to lend due to the sudden deterioration in the company’s trading position.

Decisions needed to be made and made quickly. But in this Mr. A found his hands tied as Mrs. B was too pre-occupied to deal with the business and, frankly, as she told Mr. A, she wasn’t interested in having half of a company on paper, she wanted the value of the business Mr. B had helped build up in cash.

To try and alleviate the outgoings, Mr. A thought about reducing dividends to Mrs. B since she had received significant payouts from Mr. B’s personal life assurance and the company’s Death In Service. However, to do so, he would need to take the same reduction in income himself, which he simply could not do, since there was no difference between the shares of the company.

For Mr. A, the loss of a close friend was almost certainly about to be followed by the loss of his business.

So what could Mr. A and Mr. B have done to protect both themselves and the company? For a relatively insignificant outlay (certainly when judged by the potential outcome of loss of the business), they could have: –

  • Established Key person policies for each of them to provide a cash injection to the company in the event of death of one of them (They could also have extended this to include a payout on diagnosis of a critical illness)
  • Put in place a Shareholder agreement to ensure that on the death of one shareholder, the survivor would have the right to acquire the shares of the deceased. This would be backed up by a life assurance policy to ensure sufficient money is in place to pay to the deceased’s next of kin a fair amount for the shares thereby leaving the surviving shareholder in control of the company and the deceased’s next of kin with cash.

It’s far too easy to become bogged down in the day-to-day running of a business and forget about the big picture. Sadly, accidents do happen and companies do go to the wall for lack of simple planning.

Catastrophes do happen. If one happens to you, don’t let it become a tragedy.

For an initial discussion, contact us on 0333 241 3350.

This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned about the content hereof and any such action or inaction. Professional advice is necessary for every case.

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