What Happens to a Business When a Shareholder Dies?
Most business owners with fellow shareholders assume that if one of them dies, the others will simply buy the shares. It sounds straightforward. The question nobody asks until it’s too late is where the money comes from.
What actually happens to the shares
When a shareholder dies, their shares don’t disappear, and they don’t automatically pass to the other owners. They normally pass to the family under the will, or under the intestacy rules if there isn’t one. So a husband, wife or adult children can suddenly own part of a company they have never worked in.
Why that’s a problem for both sides
For the surviving owners, there’s a new shareholder who may want a say in decisions, expect dividends, or want to sell to someone you’d never choose to work with.
For the family, shares in a private company can be hard to sell and may pay nothing for years. What they usually need is money, not a stake in a business they can’t influence.
Nobody is at fault. It’s just a situation nobody planned for.
The money question
Even when everyone agrees on a sale, the remaining shareholders rarely have the funds sitting in the bank at short notice. And trying to borrow is harder at the exact moment the business has just lost one of its directors.
How shareholder protection helps
Shareholder protection provides the money for the remaining owners to buy the shares if a shareholder dies, and often if they become critically ill. It’s usually paired with a legal agreement that sets out how the shares will be sold. The policies are normally written in trust so the money reaches the right people quickly.
Done properly, the business stays with the people running it and the family receives fair value for the shares. The right structure depends on your company, your shareholders’ agreement, and advice from your solicitor and accountant.
Three questions worth asking this week
- Do we have a shareholders’ agreement, and does it say what happens on death or serious illness?
- Do we know roughly what each person’s shares are worth today?
- If one of us died tomorrow, where would the money come from?
If any answer is “I’m not sure”, that’s worth looking at now, while it’s a planning conversation and not a crisis.
I’m based in Sutton Coldfield and meet business owners in person across the West Midlands, and anywhere else in the UK by video call. Read more about Shareholder Protection or take the free Business Resilience Health Check.
This article is general information, not advice. The right approach depends on your circumstances.