Planning for the Worst-Case Scenario

We often like to think of ourselves as invincible. A lot of the time we are. I am constantly amazed by what business owners manage to achieve whilst also balancing the never-ending challenges of running a business, especially over the past three years.

Sadly, sometimes life events can bring a halt to our best laid plans. I recently helped a family friend through a very difficult situation which I wanted to share so that you can ensure you have the relevant plans in place for you, your business and your family.


My family friend was happily married with three children. Her husband was a one third shareholder in a professional service company. He was in his early 40s and was diagnosed with terminal cancer. Very sadly, he died six months later.

I became involved, after his death, and it was clear that little planning (which was not that unsurprising given his age) had been put in place. This left his wife and children in a difficult situation.

There was no life insurance in place, and by the time he received his diagnosis, it was too late to get any insurance in place. There was also no provision in any of the company’s constitutional documents as to what happened with the shares.

As a result, my contact was left with a large mortgage to pay, three children to support and minimal income as she, at the time, was retraining. It soon became apparent that the shares in the company were not as valuable as she had hoped.

To their credit, the remaining shareholders helped support the former shareholder’s wife until we eventually agreed terms for the sale of the shares. The lump sum was lower than we had initially hoped but it gave the family a level of security going forward.

It was not an easy process and is one which I would not want anyone to go through, especially as other shareholders may not be as supportive as they were in this scenario.

Given that the majority of business owners are growing their business ultimately for their family’s benefit, I wanted to set out some of the points which you may want to consider.


1. Set out a clear process in the articles of association or shareholders’ agreement as to what will happen on the death of a shareholder.

Model articles will not have any provisions as to what happens to shares on death. This means that the shares will transfer in accordance with your will (or the rules of intestacy if you do not have a will in place). This might not be ideal as your fellow shareholders went in to business with you and not the beneficiaries of your will. Your beneficiaries owning shares becomes a bigger issue if income has traditionally been derived from dividends as how the surviving shareholders are remunerated may need to change. 

By tailoring the company’s articles of association, provisions can be include which set out exactly what happens to the shares on death. Often, a provision is made for the shares to be transferred to the other shareholders. If this happens, thought needs to be given as to how the shares should be valued. If the remaining shareholders or the company are unlikely to have the funds to purchase the shares, you may want to come up with alternative arrangements.


2. Consider whether a cross option agreement may be suitable for your business model.

Depending on the cost of any premiums, and the value of the company, it could be an option to put in place a life assurance policy that is held in trust and funds the purchase of your shares from your estate by your fellow shareholders.

The cross option gives a period of time for the remaining shareholders to purchase the shares. If they do not take up the option, your executors or personal representatives then have the right to force the remaining shareholders to purchase the shares.

The big advantage of this process is that there is a readily available cash sum which can provide security for your family whilst at the same time allowing your fellow shareholders to: (i) retain ownership; (ii) not use their own or company funds to purchase the shares; and (iii) remain on remuneration structures which depend on shareholders working in the company on a full-time basis.


3. Ensure you have adequate life assurance in place for you and your spouse/ civil partner 

Even if you have a cross option in place, you can purchase additional policies which would pay out on death or in the event of a life-threatening illness. The important thing is to make sure that you have sufficient cover in place to provide financial security for your family. An independent financial advisor should be able to help you put in place policies and work out if you need additional policies.

I would also recommend ensuring that your spouse or civil partner has adequate cover in place because if they were to die, it may be that you will need additional funds to cover the mortgage or additional childcare costs.


4. Make sure you have a will in place and that it is up to date

If you do not have a will in place, your estate will be divided up in accordance with the rules of intestacy. The rules of intestacy are based on an act of parliament from 1925 and may result in your assets being split in unusual ways. For example, if you are married any value of your estate above £270,000 is split between 50:50 between your spouse and your children. This might not be what you envisaged would happen or what your fellow shareholders want to happen.

Even if you have a will, we recommend that you double check the provisions to ensure that there is not a conflict between your will and what the company’s constitutional documents say as this could cause issues for your executors and fellow shareholders.


5. Consider having a lasting power of attorney for both financial and health matters.

Lasting powers of attorney allow named individuals to make certain decisions on your behalf if you become incapacitated. Most of us assume that this is something we only need to worry about as we get older and the risk of dementia increases. Whilst this is the most likely scenario where LPAs are used, if you become severely ill or are involved in an accident, they could prove very useful to have in place.

Whilst most LPAs relate to personal affairs, it is possible for them to be tailored to cover decisions in relation to your business. By having an LPA in place, your business will be able to continue being operated as well as ensuring that your personal affairs can be handled.


6. Consider what the effect on your business would be if you were unable to work for a prolonged period or were to die.

In owner managed businesses, the death of a key shareholder can have a serious impact on the business as a key individual will be missing. In some circumstances, it might be sensible to have key person insurance which will help fund the salary of a replacement.

Doing a health check on your business to ensure that everyone is replaceable is important. No one person should be the only person who can do a task otherwise you are putting the business at risk.


Given the day-to-day pressures on business owners, considering these issues and then implementing what is decided is often left at the bottom of the to do list.

I highly recommend that you do spend to time to consider these points and discuss them with your fellow shareholders and family.

Even if you have arrangements in place, it is worth reviewing them to ensure that they reflect the reality of your company now as circumstances may have changed, especially if the documents were drafted a number of years ago.

I would be delighted to discuss with you your plans and thoughts for your business because for us business is personal.


If you would like further advice in connection with this topic, please contact Jack Gardener on 01256 854665 or [email protected]