Parsonage’s View on Director Share Purchase

Director Share Purchase is an agreement underpinned by life cover that is there to try and protect business owners and their families.

So what does it do?

It is there to protect company owners and families in the event of an owner dying prematurely. 

Let's say that the company was founded by four friends, each with a 25% holding. Now, 10 years on, the company is doing well and providing jobs and income to the directors and the employees and the business has earned a market value of £800,000. 

If one of the directors were to pass away unexpectedly, whether it be from an accident or an illness, the most likely thing is that his or her family will inherit the shares. In this scenario what would you want to happen? 

Would you, the remaining three working owners, want to give up 25% of the profits to someone who doesn’t contribute to the on-going success of the business? Do you want to risk the beneficiary selling the shares to an unknown 3rd party that you may or may not wish to work with? 

More likely, you would like to buy the shares and retain full control of the company. 

Regardless of what you want, the decision may be out of your hands. 

DSP essentially puts an agreement in place that says:

1. If you wish to buy them, the beneficiary must sell them to you.

2. If the beneficiary wants to sell them, you must buy them.

So, this first step ‘the cross option agreement’ takes away the ambiguity and gives each party the power to get what they want. 

Great, but do you have £200,000 available in the business to honour the deal?

Realistically this is unlikely. So part of DSP involves the directors taking out life cover on each other to fund the transaction. 

The life cover in this case would pay £200,000 to the remain three directors to pay the beneficiary of the shares. 

We now have a very different picture. The family have a lump sum of £200,000 which may prove vital in maintaining their standard of living at an exceptionally difficult time and the remaining owners have the control of the company.

It may seem unlikely, but unfortunately it is all too common. 

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