What if a Shareholder or Partner dies in a business?

by | May 29, 2024

If you are a business owner in a partnership or a shareholding with others, have you ever given any consideration to what the impact would be on the business or your family should you die or suffer with an illness? In this article, Dan Payne, an expert financial advisor who works closely with us at Cottons, explores the complexities and solutions for safeguarding your business. 

I have worked with many business owners over the past 20 or so years, and I have seen many different impacts of shareholders suffering with illness or dying.  Other than the emotional impact, you hope that in the event of death, it would be simple – your family receive the fair value of the shareholding and sail into the sunset, your business partners being able to continue running the company without you, and with everyone content that they are able to carry on without too much interruption and upheaval.  Alas this is not always the case.

I have seen instances when the surviving shareholder(s) have ended up ‘phoenixing’ the company, reducing the share value to zero, and opening up an alternative operation, leaving the estate of the deceased with zero value from the company.  I have seen cases where the family of the deceased has come into the business as legitimate shareholders and demanded that they are part of the decision process, leading to resentment from the other shareholders and ultimately a fall out that can be very damaging to the business.  I have also seen the financial impact that the death of a Director in a company can have, both on profitability and on the value of the shareholdings.

One particular example I came across many years ago, which I quite often talk about with shareholding Directors when I have this conversation was as follows (with a change to certain facts to protect those involved, although the outcome was exactly as stated):

There were two school friends who set up a construction business on a 50/50 ownership, which over time had grown significantly.  One of the shareholders was the operations and administration manager, whilst the other was more sales based and looked after the key relationships with customers and did a lot of networking.  This suited their personalities, and neither could perform each other’s role particularly well if asked to do so!  The business was turning over around £20-30million per annum, employing over 50 staff and with large premises.  They had reached their early 40s when one of the Directors suddenly suffered a heart attack when mowing the lawn in his garden.  He was found by his wife who unfortunately was unable to resuscitate him.

Once the family arrangements had been sorted out, the widow of the deceased shareholder inherited 50% of the business share.  She had no intention of being involved in the business and did not particularly get on with the surviving shareholder.  She had the business valued independently at £10million and said that she wanted her share of the business, representing £5million.  The surviving shareholder did not have the means to pay this, so had to reluctantly devise a payment plan to buy them over time, whilst still having to pay out dividends to her as the shareholder, even though she was having no input in the business.

The widow soon became inpatient and demanded the shares were bought from her so she could have a clean break.  They both took legal advice that achieved nothing other than them having expensive legal fees (which was great for the Solicitors!).  It also publicised the case, which resulted in one of their main competitors contacting the widow directly to offer to purchase the shares from her for a lot less than they were worth.  By this stage, she had had enough of the ongoing stress caused by the dispute, so she accepted their offer.  They then legally owned 50% of the company and proceeded to effectively destroy the business, subsequently taking their customers and staff.

There was nothing that the surviving shareholder could do, as it was her right to sell the shareholding, he could not afford to buy them, and he was now in business with someone he did not want to be in business with.  The result was that the business was liquidated, the surviving shareholder was bankrupted, and he suffered with severe emotional trauma as a result.  All because his business partner died unexpectedly, and they did not have a proper legal agreement to prepare for this event.

This is a relatively simplified version of the actual events, but the concept remains true.  So what could have been done to mitigate or even prevent this situation from escalating in the way it did?  I often suggest 4 considerations (depending on the scenario of course) to company Directors as follows:

  • There should be an up-to-date legal Shareholder agreement to state what would happen in the event of one of the shareholders dying. One of the more commonly used versions of this is the ‘cross-option agreement’.  This allows either party (the surviving shareholders and the estate of the deceased) to have the legal right to buy or sell the shares.  In other words, if the surviving shareholders exercise their option to buy the shares, the estate legally have to sell them.  If the estate exercises their option to sell the shares, the surviving shareholders legally have to buy them.  This helps to control ownership and to stop any third parties getting involved, but either way, the surviving shareholders have to buy the shares in either case.

You must always seek legal advice in this area, as there are many considerations that need to be discussed.

  • Buying the shares can be very expensive, so you should consider taking out life insurance on the shareholders to cover the cost of buying their shares. This is done alongside the shareholder agreement (above) so that the surviving shareholders can exercise their option to buy the shares and then have the finance in place to do this without having to damage the company’s (or their own) finances too much.
  • You should also consider the impact on the business’s finances should one of the shareholders die. This could be through the cost of replacement with an employee, a period of recovery, a loss in profits, etc.  Therefore it is quite common for shareholders to also set up separate life cover for the benefit of the business, known as ‘keyperson cover’.  This is the same underlying policy, but instead of paying to the surviving shareholders, the money is paid to the company to cover part/all of the financial impact.
  • I also quite often recommend ‘relevant life cover’ to Directors, which is a one-person employee benefit of life cover, paid for by the business as a Corporation Tax deductible administrative expense and not a benefit in kind. This will provide your family with some cover while the business adjustments are made to replace income and repay mortgage debt, for example.

Please bear in mind that this list is not exhaustive, and we would recommend that you seek financial advice to help you to achieve your objectives over time and to utilise as many of the allowances available to you as possible.   

Meet Daniel Payne, Chartered Financial Planner at Golden Oak Wealth Management. Dan works closely with Cottons to offer expert regulated financial advice, bringing valuable insights for our clients. While we’re great at chartered accountancy and business advice, it’s important to know that financial planning has its own set of rules overseen by the FCA in the UK. As your accountants, we’re here to help navigate you to experts like Daniel for thorough financial planning. Understanding this difference is key, and we’re all about making things clear rather than putting up barriers.


This article is a joint effort to keep you well-informed. If you need any assistance, feel free to reach out to us or directly to Daniel.

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This article is for information purposes only and it should not be considered as investment advice or a personalised recommendation. Golden Oak Wealth Management are not accountants or tax specialists, so please contact Cottons Group or seek independent help if you are unsure of any aspects of your tax situation. The data contained within this document has been sourced by Golden Oak Wealth Management and may be subject to change. Investing involves risk, so you should make informed decisions based on your risk tolerance and investment objectives. Past performance is not indicative of future returns. 


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