Why owners need more than a policy
Insurance can put money in the right hands, but it cannot force anyone to sell. Without an agreement, a deceased owner's family could refuse to part with the shares, or ask for a price the others cannot meet. The surviving owners would hold the cash and still lack control.
A cross-option agreement removes that uncertainty. If the surviving owners want to buy, the estate must sell. If the estate wants to sell, the owners must buy. Either way, the price follows the valuation method agreed in advance. Both sides know where they stand from the outset, which spares a grieving family a negotiation they never asked for.
Options versus a binding sale
Some older arrangements used a buy and sell agreement, which obliged both sides to complete a sale on death. HMRC can treat that as a binding contract for sale, and shares under such a contract may lose business relief from inheritance tax.
Options work differently. Until someone exercises one, no sale is agreed, so the shares are not normally treated as being under a binding contract. Your solicitor and accountant can confirm how this applies to your business, but it is the main reason most advisers now recommend options.
What the agreement should cover
A good agreement leaves little to argue about. It should state how the business will be valued, how long each side has to exercise its option and how the price is paid. It also needs to work with the company's articles or the partnership deed.
For serious illness, many firms use a single option, where only the ill owner can choose to sell. That lets a person who recovers keep their stake, while giving someone who cannot carry on a way to realise its value. The surviving owners keep their option to buy on death, so the business stays protected if the illness proves fatal.
- Valuation method and how often it is updated
- Time limits for exercising each option
- Whether death, serious illness or both trigger the options
- How the policies and trusts link to the agreement
- What happens when an owner joins or leaves
Keeping the agreement up to date
An agreement signed years ago can fall out of step with the business. Owners may have changed, profits may have grown, or the company may have issued new shares. Any of these can leave the agreement, the valuation and the policies pointing in different directions.
Review it whenever ownership changes, and every few years even if nothing obvious has moved. New owners usually sign a deed of adherence or a fresh agreement, and their cover should start at the same time. Your solicitor can advise on the right paperwork for your business.
How Hi Tomorrow helps alongside your solicitor
We arrange the insurance that funds the agreement, setting each owner's cover to match the value of their share and placing each policy in the right business trust. We can explain the options to all the owners before they meet the solicitor.
We do not draft legal documents. Your solicitor writes the agreement, and we make sure the policies line up with it, including the triggers for illness claims. When the business grows or owners change, we help you review both together.