View more on these topics

Tony Wickenden: The importance of testing for over-reliance

Advisers should look to work with business clients to build a plan that recognises their aspirations and plans in relation to their business

Tony-Wickenden-MM-Peach-700x450.jpg

If you are a business owner, alone or in association with others, you will likely be only too aware of the importance that its success has in relation to your financial well-being.

That will almost certainly be so in relation to your financial position right now, but it will probably also be so in the future, whatever that may be, in relation to your business.

And that will hold true whether you are looking to sell the business and live on the proceeds, or continue to take an income from the business, remaining involved and working or just taking profits.

Many advisers (and their clients) who are owners/managers of private businesses (small/medium enterprises – SMEs) would agree that because the business consumes so much of their time and energy, physical and emotional, it (the business) ends up representing their main, and in some cases, only financial asset apart from their home. And, in many cases, this state of affairs will just “come to pass” without it ever being a specific strategic objective.

Even where the business has no discernible independent value and there is no clearly structured plan for the future of the business there is, nevertheless, all too frequently a “de facto” overreliance on the business as the means of providing financial well being for the owners in the future.

This represents a real risk – especially where it isn’t recognised. Owners/managers in this position will, in effect, be sleepwalking into a potentially difficult future. The way things are now almost certainly won’t be the way things will be in the future.

Your health and motivation will almost certainly change and the business’ ability to continue to evolve with changing market needs, expectations  and methods of delivery, so as to keep vital and ahead of the competition, will be essential if there is to be even a chance of continuing success. And when you realise the risk, when it’s most acute and pressing, that will be the time when it may well be too late to do anything about it.

In an uncertain world that recognises the importance of investment diversification to minimise/manage risk, this effective over reliance on a single unquoted asset represents a real risk. Interestingly, many who are in this position as a result of (probably unconscious) over dependence on their business, when tested to determine their “appetite for risk” in relation to any sums to invest, will probably score as “balanced” or “low risk”. 

However, their actions and their reality (ie being, as a matter of fact, “overweight” in a single private company investment – their business) would say otherwise. 

It is the role of the adviser to make sure that their clients recognise and address this position if it’s relevant. To really “get” the importance of this, advisers could do worse than look at/audit their own position to test for “over reliance”.

At the heart of this strategy is the need for the business owner (adviser or client) to accept the importance of their business interest as an asset class and to develop a plan that integrates the client’s business interest into the overall strategy but which also aims, over time, to reduce any risk of over reliance. Of course, such strategies should also look to minimise tax through effective planning so as to maximise the chance of achieving your financial objectives.

In this, advisers should look to work with business clients to build a plan that recognises their aspirations and plans in relation to their business – taking account of the fact that, for most business owners, the future in relation to their business may be less than certain. For example it could involve:

  • A sale or partial sale to realise capital to reinvest
  • Continued full-time working (in effect being a “nevertiree”)
  • Continued part-time working (“taking it a bit easier”)
  • A gift or other transfer of shares to family members or key employees – with or without continued business involvement

The list is not exhaustive but all of these strategies and their successful implementation would have an impact on the amount of income/capital required from other assets. It will be essential to think very carefully about the chosen route and to assign a “risk rating” to it once a plan has been built for implementing the chosen strategy. And, of course, the strategy and its viability then need to be kept under review in the light of what is actually happening. Things will change so being open to changing strategy, if it’s the right thing to do, will be essential.

Tony Wickenden is joint managing director of Technical Connection

Access full CPD, technical updates and business generation ideas through Techlink Professional. Go to www.techlink.co.uk and click theContact Us link at the top of the screen and then request your free trial from the drop down menu.

Recommended

Martin Greenwood Tenet 700.jpg
2

Tenet returns to profit after advisers bank trail

Tenet has posted a profit of £300,183 for the year to the end of September 2013, a turnaround from the £4.5m loss the network made in 2012. Tenet says the boost was partly due to an increase in turnover as advisers used Q1 last year to finalise business on a pre-RDR basis. The group, which […]

Legal-and-General-LG-500x320.jpg

L&G doubles annuity quote guarantee period to 35 days

Legal & General has extended its annuity quote guarantee period from 18 days to 35 days in a bid to ease time and cost pressures on advisers and direct customers. The extended guarantee period applies to both standard and enhanced annuity quotes and comes into effect immediately. The provider will also continue to offer its […]

Phil-Wickenden-MM-Peach-700x450.jpg

What advisers are saying: The personality test

Most advertising and selling initiatives communicate a diatribe of product “features” and do not offer much by way of distinctive value or any focused or truly compelling benefit. This is despite the fact that customers no longer want to be spammed with information about the product or service; they want to feel the connection with […]

Skandia-House-Building-700x450.jpg

BNY Mellon’s Scott Goodsir joins Skandia as UK distribution head

Scott Goodsir has joined Skandia as managing director of UK distribution. Goodsir was most recently managing director, UK wholesale at BNY Mellon, where he worked for 15 years. Previously he held a number of sales roles within Newton Investment Management and Mellon Global Investments. Goodsir will report to Old Mutual Wealth managing director and head […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com