Anybody who runs their own business should be aware that they are making an investment. Whenever a business owner makes a choice with regard to the use of funds in the business, an investment choice is being made.
Much like any other investment, a business is a means of delivering an income – usually taken through a profit share, dividend or salary, the exact method depending on the structure of the business and the tax and National Insurance implications of the choices appropriate to that business – and capital value.
Most advisers who have the owner-managers of incorporated private businesses as their clients will be involved to an extent, usually in the quarter leading up to the year end, in the process of determining whether and how corporate profits should be removed for the benefit of the owner-manager so as to minimise tax and NI and maximise the benefits received. Only more rarely will there be any continuing consideration of how to build, let alone realise, the capital value of the business.
In considering how a business can deliver capital value to its owners, it is first necessary to consider where that capital value comes from. The first thing to keep in mind is that the company itself can actually constitute the value. Even if the company is not the direct deliverer of capital value, it can certainly provide the means of creating capital value.
The gradual emergence of the wrap platform as a place to hold and aggregate investments is a development that any financial planner should be aware of. Holding products on a wrap platform does not diminish the ability to tax plan with those products.
But to the extent that an owner-manager chooses to develop the value of the business itself rather than extract the funds, what choices exist? Where does the company's wealth or value lie? Perhaps most obviously, at least when looking at its balance sheet, a company's wealth will lie in the value of its assets. Here, I would stress that it is the real rather than tax written-down value that counts. For many businesses, though, especially knowledge-based businesses, the value lies in its intangible assets, in other words, the goodwill, the value of its brand and its intellectual capital. In many cases, this is not stated on the balance sheet.
For those who have aspirations for building and then realising value from their business, this may operate as a deterrent to even thinking about alternatives and, the more committed to this route that business owners are, the more closed-minded they can become about the value of even some diversification.
How often have you heard the retort: “My business is my pension” when attempting to persuade a business owner of the merits of investing in approved pension arrangements or alternative forms of investment to build a fund outside the business to provide a hedge against the business not delivering the capital value that is hoped for?
It does not take a great deal of innovative thinking to realise the risk of relying entirely on one's business as the means of providing future financial security. There are many warnings that can be given to anyone relying entirely on their private business to deliver future financial security. Most, if not all of you, will have some apocryphal story on this very subject. More on this issue next week.