Business Protection for Family Businesses

A family business is two things at once, and protection has to deal with both.

It is a company with shares, directors and a value, and it is also a family with expectations, histories and people who may or may not want to be involved. Most of the difficult questions sit where those two overlap, and they surface at the worst possible moment unless somebody has dealt with them beforehand.

The good news is that the problems are predictable, which means they can be planned for.

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The short answer

Family businesses carry a problem other companies do not: the shareholders are related, so a death creates both an ownership question and a family one. The usual difficulty is fairness between children who work in the business and children who do not, and insurance is frequently the cleanest way to settle it without breaking up the company.

What this changes

Shares are held by relatives, so a death transfers ownership within the family rather than to an outsider
Some children may work in the business and others may not, which makes equal treatment complicated
A spouse may inherit shares in a company they have never worked in
The business may be the largest asset in the estate and the hardest to turn into money
There may be an expectation of succession that has never been written down
Inheritance tax treatment of business assets depends on structure and on what happens afterwards

The bit people miss

The sharpest version is fairness between siblings. One child has worked in the business for fifteen years and expects to inherit it; another has a different career and expects an equal share of the estate. Splitting the shares equally leaves the working child with a partner who takes dividends and no interest, and leaving the business entirely to one child leaves the other with far less. Life cover on the parent, written in trust for the child not in the business, is frequently the cleanest way to balance it without having to sell or split the company.

Equal Is Not The Same As Fair

This is the conversation family businesses most often avoid, and avoiding it is what causes the damage.

If one child has spent fifteen years building the business and another has not, dividing the shares equally is simple and produces an odd outcome: the working child now has a shareholder who takes a share of the profits without contributing, and the non-working child owns something illiquid they cannot easily sell. Neither is happy and the relationship takes the strain.

Life cover is often the neatest answer. The business passes to the child who runs it, and a policy pays the equivalent value to the other, in cash, quickly and outside the estate if written in trust. The company stays intact and nobody has to be bought out of something they never wanted. It is worth working the figures out with an accountant, because it depends on a credible valuation.

Write Down What Everybody Assumes

Family businesses run on understandings, and understandings do not survive a death intact.

There is usually a shared sense of who will take over, what somebody's share is worth, and what happens to the spouse who has never worked there. None of it is written down, because writing it down means having the conversation. When the moment comes, several people discover they remembered it differently and are now negotiating during a bereavement.

A cross option agreement between shareholders, a current valuation and an up to date will are the documents that make insurance work. Without them a policy may pay out to somebody who is not expecting to buy shares, or at a value nobody agrees with. The paperwork is the boring half and it is the half that decides whether the money helps.

What usually fits, and why

Life cover to equalise an estate

Lets one child inherit the business and the other receive an equivalent value in cash, without the company having to be sold or split.

Shareholder protection

Where shares are held by several family members, this funds the remaining shareholders to buy a deceased relative's shares at an agreed value.

Keyman insurance

Family businesses frequently depend on one person's relationships and knowledge far more than the structure suggests.

Common questions

How do you treat children fairly when only one works in the business?+

Splitting shares equally is simple and often unfair in practice: the working child ends up with a shareholder who takes profits without contributing, and the other owns something they cannot easily sell. Life cover on the parent, written in trust for the child not in the business, lets one inherit the company and the other receive equivalent value in cash without the business being split or sold.

What happens if a shareholder's spouse inherits their shares?+

They become a shareholder in a company they may never have worked in, with rights to information and a share of profits, alongside family members who are running it. That is rarely what anybody intended. Shareholder protection with a cross option agreement funds the remaining shareholders to buy those shares at an agreed value, which usually suits everybody better.

Is the business covered by inheritance tax reliefs?+

Reliefs exist for qualifying business assets and the treatment depends on the structure, what the business does and what happens to it afterwards. It is not something to rely on from a web page, and it has been subject to change, so it needs confirming with your accountant for your specific situation. Insurance is often used to provide liquidity for whatever the liability turns out to be.

We have never written any of this down. Where do we start?+

With the conversation and the valuation, before the insurance. A cross option agreement between shareholders, a current view of what the business is worth and up to date wills are what make a policy useful. Without them the money may arrive with nobody agreed on what it is for, which is a better problem than no money and still a problem.

Does the business depend on one person more than the shares suggest?+

In family businesses, very often. Relationships with customers and suppliers, knowledge of how things actually work and the authority to make decisions frequently sit with one person regardless of who owns what. Keyman insurance covers the business for the disruption of losing them, which is separate from covering the shares.

Cover that often goes with this

The gaps we most often find sitting next to this one.