Shareholder protection insurance provides financial reassurance that in the event of the sudden death or critical illness of a shareholder, meaning they can no longer operate in the business, the future of the company can be assured.
Valuing a company to understand the level of shareholder protection needed can be complex.
Here are the most common methods used.
Determining the value of a business
Determining the value of a business requires an understanding of the company’s finances, assets, and operations.
There are several methods that can be used to determine the value of a business, each with its own strengths and weaknesses.
Asset-based valuation
This involves assessing the company’s tangible and intangible assets to determine the total value of the business.
Tangible assets include equipment, inventory, and property.
Intangible assets include patents or trademarks.
Asset-based valuation is straightforward and can be useful for businesses with many tangible assets.
However, it may not be appropriate for businesses that rely on intellectual property or other intangible assets that don’t have a clear market value.
Income-based valuation
This involves analysing a company’s financial performance and future earnings potential to determine its value. Factors like revenue, expenses and cash flow should be used to estimate future potential earnings.
Income valuations can be accurate for a business with an established track record of stable, predictable earnings as it relies on reliable financial data to understand past performance and industry trends and competition.
For newer businesses without the necessary financial history, income valuation may not be the best option for valuing the business for shareholder protection.
Market-based valuation
Market-based valuation involves looking at the prices of similar businesses and comparing them. This approach can be useful when looking for a rough estimate of a business’s value, but it’s less accurate than other methods.
Market-based valuation can be useful in situations where there are a lot of comparable businesses in the same industry.
Once the valuation of the business has been established it should then be identified how much of the company value sits with each shareholder to figure out how much cover will be needed.
Regularly reviewing and updating business valuations
It’s essential to regularly review and update a business’ valuation to ensure that it accurately reflects the current state of the company.
If the business has grown or acquired more assets in the period since the initial shareholder protection was taken out, it could be that any pay out won’t cover the new valuation if based on outdated numbers.
Therefore, it’s critical that any shareholder protection is regularly reviewed, especially following any periods of significant growth or change within the business.
Ensuring business protection with shareholder insurance
Shareholder protection agreements can ensure that a business remains secure in the face of unexpected events.
With an agreement in place along with the necessary insurance to provide the finances for outgoing shares to remain in the company, businesses can ensure a smooth transition during difficult times, ensuring its financial future isn’t put in jeopardy.
