Family businesses are built on trust, legacy and long-term relationships. But what happens when the unexpected occurs – such as the death of a shareholder? Without a clear succession plan, both the business and the family may face serious financial and operational challenges.
That’s why it is essential for shareholders to think ahead. Planning for succession is not just about protecting the company and ensuring business continuity, it is also about safeguarding family harmony. The consequences can be significant for both surviving shareholders and the next of kin. Here are some of the most common issues each may face – and why having a financial safety net, such as shareholder protection insurance, can make all the difference:
Surviving Shareholders – Potential Issues
- Loss of Control – If the deceased owned more than 50% of the company, the remaining shareholders may find themselves working with a new controlling shareholder – possibly the deceased’s spouse or children. This can lead to disagreements about how the business should be run, especially if the new shareholder has no prior experience in the business.
- Refusal to Sell – The ideal outcome for surviving shareholders may be to buy back the deceased’s shareholding from their next of kin. But what happens if the next of kin refuses to sell? This could result in deadlock and strain on business operations.
- Lack of Liquid Capital – Even if the next of kin is willing to sell, the surviving shareholders may lack sufficient liquid capital to purchase the shares. Borrowing the necessary funds could result in a long-term financial burden, and this financial strain can affect growth and stability.
- Shares Passed to an Outside Party – If the next of kin wants to sell and the surviving shareholders are unable to buy, the shares may be sold to a third party – possibly a competitor or someone with no experience in the business. This could disrupt the company’s long-term strategy and introduce competitive risk.
Next of Kin – Potential Issues
- An Illiquid Asset – If the shares are not sold, the next of kin may be left holding a paper asset that produces little or no income. This situation could be even more serious if the shares trigger an immediate inheritance tax liability, creating financial stress during an already difficult time.
- No Ready Market for Shares – There may be no obvious buyer for the shares, leaving the next of kin in a difficult financial position. This lack of liquidity can delay estate settlement and family financial planning.
A Real-Life Scenario
Imagine a family-owned artisan bakery in Ireland. Two brothers run the business together. One owns 60% of the shares, and the other owns 40%. Everything works well – until the unexpected happens. The majority shareholder passes away suddenly.
What happens next? His shares go to his next of kin, who has no experience running a bakery. Overnight, the surviving brother loses control of the business. He wants to buy back the shares to keep the bakery in the family, but there’s a problem: he doesn’t have the cash. Taking out a large loan would put the business under financial strain. If he can’t buy the shares, the next of kin might sell them to an outsider – maybe even a competitor. This could change the direction of the business completely.
Now imagine the same situation with shareholder protection in place. The bakery has a corporate shareholder protection policy. The company owns life insurance policies on its shareholders. When one shareholder dies, the policy pays out a lump sum to the company. That money is used to buy back the shares from the deceased’s estate. The result? The surviving brother keeps control of the bakery, the family receives fair value for their shares, and the business continues without disruption.
For smaller businesses or those with only two shareholders, personal shareholder protection may be more suitable. In that case, each shareholder takes out a policy on themselves, and the payout is used by the other shareholder to purchase the shares.
Why Planning Matters and the Role of Expert Advice
Without proper planning, the death of a shareholder can create uncertainty for both the business and the family. It can lead to loss of control, financial strain, and even the sale of shares to outsiders. For the next of kin, it can mean holding an illiquid asset that is difficult to sell and may trigger tax liabilities.
The right shareholder protection ensures funds are available to buy back shares quickly and fairly. This helps the business remain in the hands of the surviving shareholders while giving the family financial security during a difficult time.
Getting expert advice is essential. A qualified financial advisor with experience in business protection can support the process, working hand in hand with your own professional legal and tax advisors and will liaise with the insurers’ underwriters throughout. A well-structured plan aims to:
- Identify the most suitable shareholder protection strategy, whether corporate or personal.
- Assess liquidity needs for surviving shareholders and next of kin.
- Structure buy-back arrangements to minimise tax exposure, which can vary significantly depending on how policies are structured and how payouts are treated.
- Ensure the plan is legally sound, fair, and aligned with both business and family interests.
Working with specialists ensures that all financial, operational and tax considerations are accounted for, helping to avoid costly mistakes and unintended outcomes. By putting a clear, practical, and tax-efficient plan in place, businesses can secure continuity, maintain control, and protect family relationships.
If you want to make sure your business is prepared and your succession plan is robust, contact us today to discuss your options and put a plan in place that works for your business and your family.
E: [email protected] Ph: 083 8618048
Frank Glennon (Life & Pensions) Limited, trading as “Arachas Employee Benefits”, “Arachas Financial Planning”, “Glennon”, “Glennon Employee Benefits” and “Glennon Financial Planning”, is regulated by the Central Bank of Ireland.
