Unexpected Bereavement in Business – What do I do?

Bereavement will affect all of us at one point or another whether it be through family, friends or even through business and work. Death does not discriminate and dealing with the aftermath of a bereavement can be an overwhelming and confusing process, particularly when it involves the continuation of a business someone may have left behind. 

It can be difficult to even consider how one might navigate the complexities that arise when a Business owner passes away, for both the remaining business owners, and the family of the late owner too. 

The deceased’s family may feel extremely overwhelmed and not have the time, experience or inclination to be involved in managing their inherited business interest. Or, in some cases, the family may want to be involved but do not know where to start or what to do.

Bereavement can also change the dynamics and chemistry within business relationships, causing problems for the remaining owners and therefore the future functioning of the business. Additionally, the business owners may not have the funds to purchase the deceased’s interests, causing financial angst and uncertainty.

As a business owner, how can we avoid these problems arising in such circumstances?

To prepare for this overwhelming eventuality and avoid such problems, business owners often enter into cross option arrangements involving the following steps: –

1. Each owner takes out a life policy, for themselves, for the estimated value of their business interest
2. The owners then execute a declaration of trust. This states  that on their death, the proceeds of the life policy are paid to the other business owners, putting them in funds to buy out the deceased’s business interest;
3. Each business owner enters into a cross-option agreement, also known as a double-option or a put and call option agreement, with the other owners, providing that on their death:-
   1. the deceased owner’s family have the option to require the other owners to buy the deceased’s interest; and
   2. the other owners have the option to require the deceased’s family to sell the deceased’s interest to them.

Either of these two options (a or b) may then be exercised to bring about the required sale.

What are the advantages of Cross Option Arrangements?

A major advantage of these arrangements is that it enables the deceased’s family to realise the value of the interest inherited. It also allows the surviving owners to manage the business without interference (such as from the deceased’s family who may not share the same goals for the business as them).

References made above to business partners, equally apply to shareholders in private limited companies.

We have experience in this area and are here to support you:

At SE-Solicitors we have advised owner managers on succession planning. We have experience in managing the introduction of new and the departure of existing business partners, including drafting and advising on:-

• cross-option arrangements;
• shareholder/partnership agreements;
• articles of association;
• EMI share options;
• employment contracts.

If you would like to discuss how SE-Solicitors can assist you, please contact Hitendra Patel.

The contents of this article are a general guide only at the date of publication. It is not comprehensive, and it does not constitute legal advice. Specific legal advice should be sought in relation to the particular facts of a given situation.