One of Northern Ireland’s top commercial legal experts is urging business owners to consider the impact of COVID-19 on the future viability of their firm, should they fall victim to the pandemic.

James Morrison, commercial partner of DWF Belfast, says some business owners in Northern Ireland are worried not only about surviving the current economic shutdown, but also about ensuring financial security for their families in the event of their illness or death.

Structured

“Never before has the need for structured business succession been so urgent, yet many remain unprepared,” says Mr Morrison.

DWF’s commercial team have identified a number of issues, including the problem of beneficiaries who may have no interest in the business left to them, but may be extremely interested in realising its value.

Inactivity

“At a time of economic inactivity, when cashflow is key, finding the funds to buy out a non-participating beneficiary may not be an option.”

According to the DWF team, to avoid such problems, business owners should look at the viability of taking out a life assurance policy and then entering into a suitably drafted ‘cross option’ agreement.

"Should an owner have such an arrangement in place, upon their death, fellow owners can exercise an option to buy the deceased’s interest from their estate,” sad Mr Morrison.

“If they do not choose to do this, the deceased’s personal representatives have the option to sell such an interest to the surviving owners.

"The funding of this cross option is dealt with by the life assurance policy which, once paid out, is held in trust for the remaining owners to pay for the deceased’s interest.

Panic-free

“This not only allows the deceased’s beneficiaries to receive value in a panic-free manner, but it can also allow the share transfer to be eligible for business property relief and the proceeds of the policy to be exempt from inheritance tax."

If a cross option is being drafted, DWF says the owner should consider the price to be paid across for the business share.

The firm also points out that a life assurance policy will usually expire after five or ten years, and a cross option agreement should set out what would happen in that scenario.

Cross options

Mr Morrison also says business owners must ensure that their wills are kept up-to-date and in line with what the cross options envisage.

“We would recommend they consult their solicitor who can ensure that amendments made during lockdown will be valid. The company’s existing constitutional documents, should also, if necessary, be amended,” he adds.