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
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