Ensuring that directors and their families won’t suffer financially if things go wrong

Tom, Dick & Harry (as you might guess, not their real names) are the shareholders and directors of an IT company. We decided to contact them as the profile of their business was similar to that of other businesses whose owners we had helped – they had a turnover of between £1m & £10m, they were profitable and they had been established for more than five years.

We were able to secure a first meeting with Tom, who was concerned about the risks of being in business and the financial implications for his young family. After this initial meeting, we arranged to meet all three owners and we are able gain an understanding of their individual and collective concerns.

We identified the following concerns and issues that needed to be addressed:

• Tom, Dick and Harry wanted to understand how their families would obtain value for their shareholdings if one of them (or more) were to die.
• They wished to consider the financial impact of any one of them being unable to work, for instance if they had a serious accident or a long-term illness – how would they replace the lost revenue?
• Their company is growing and making money, yet they never seemed to have any money. What was this?
• They required clarity about their current arrangements and advice as to how effective they were in meeting their objectives.

We assessed all the information and, working with their accountants, we:

• reviewed the existing Shareholders Agreement, so that it not only reflected what each director contributed by way of time, money etc, but also set out what would happen if things went wrong
• working with their other professional advisers, reached an agreement as to the value of their business
  established a process for reviewing and agreeing this valuation each year
• put in place an ownership and profit protection strategy comprising tax-efficient agreements which enable full value to be realised for shareholdings and for business profits to be protected in the event of various scenarios
• arranged for a company Will to be written and for Tom, Dick and Harry’s personal Wills to be re-written to reflect the new agreements
• reviewed the company’s accounts and revenue and un-earthed significant cost savings.

The results so far:

• If Tom, Dick and Harry ever have a major disagreement, a robust shareholders agreement will minimise possible ambiguities or mis-understandings.
• The ownership and profits of the business are protected if one or more of the shareholders and/or directors were to become incapacitated or die.
• All these arrangements were funded from the savings we identified that the business could make in other areas
• They now meet regularly to review the arrangements, to ensure their stated aims and objectives are achieved.

Please note that although this story is based on real clients, we have changed their name and aspects of their personal information to protect their privacy and identity.

4 September 2023