Starting your own business takes drive, determination and a great deal of energy. The entrepreneurial spirit is something that gives the business owner their capacity to take their ideas from blueprint to commercial reality. It quietens the doubts they might have along the way and gives them the ability to ruthlessly focus on achieving their ambitions.
We are proud to work with a lot of entrepreneurs and business owners at First Wealth, helping them to keep their own financial planning in step with the growth of their companies. When they’re inside their commercial crucible and taking day-to-day decisions about how to move their business forward, it can be easy to forget about some of the longer-term concerns they will encounter and the legacy they would like to leave.
Our role is to help them plan how best to build a business they can pass on, while ensuring they are protected against some of the unpleasant but inevitable trials we will all face in life, like illness, incapacity and death. After putting so much energy into getting a business off the ground, it’s vital to have a plan in place to ensure the business continues in any event.
Fixing a Formal Plan
What we often see when we’re helping business-owners plan for these life events is that – even if they have thought these issues through at all – their plans are sometimes quite informal and based on casual assumptions about how things will carry on if a key team member becomes ill or dies. Loose or unspoken understandings will generally not be secure or comprehensive enough to survive a shock to the business like long-term ill-health or death, and could leave the business, its owners and staff in a vulnerable position.
For example, imagine a business run by two women in their 40s. They’ve worked hard since setting up together ten years ago and now the business is worth £5m. If one of them were to die and the other wanted to buy out their half of the business, they would need to find £2.5m to do so – not the sort of sum of money that people have just lying around. Or, if one of them lost their mental capacities, how could it be proved that any informal business agreement ever even existed between them at all? Thankfully, there are a range of instruments available to help to make sure your business is secure in all eventualities.
Will and Lasting Power of Attorney
While it’s important to have your own personal Will and Power of Attorney in place, it is also wise to take account of your wishes for your business in the same way. It is possible to create trusts in your Will to deal specifically with the business and commercial side of your affairs – a main benefit being that you can elect different individuals to deal with your personal and business affairs, with the latter appointment being a person with a more suitable level of commercial knowledge and experience.
It’s also highly advisable to get a Business Lasting Power of Attorney. This is different from a normal, personal Power of Attorney as it allows you to engage someone with an understanding of your business and the market it operates in and who you can be sure would act and guide the business in the way you would like. In the case of the business partners in the example above, it would make sure that each had access to all the right information and permissions to keep running the business in the absence of the other.
Simply using a normal Power of Attorney alone could result in a family member or friend without sufficient understanding of the commercial situation being called upon to step in. This could be highly damaging for the business and an unwelcome situation for the attorney themselves.
Business owners need to think through the implications of long-term ill health. We could perhaps imagine that if someone were off work for 12 months that they could expect to continue to be paid in the normal way, but how does this pan out over a longer period? What if they are ill over five or 10 years and taking a wage or dividend while not being able to bring money into the business? Critical illness and income protection insurance help protect against this. Critical illness insurance can pay a lump sum on diagnosis of a life-threatening illness, while income protection can be taken out to ensure an individual is paid a regular income over time, however long the illness may be.
Key person insurance allows a business to insure an important member of staff whose death or continued absence would affect the performance of the company. The business receives a lump sum if anything happens to the key staff member which can be used to bring in an emergency replacement or tide the business over while a new team member is identified.
Shareholder Agreements and Cross-Option Agreements
Quite often, when an entrepreneur, significant shareholder or business partner dies, there is no provision made for what should happen to their shares. In most situations, the desired outcome would be for the beneficiaries of the deceased to receive the value of their shares and the remaining business partner(s) to receive control of them.
However, as we noted above, the remaining partner may not have the sums to hand to buy the shares back. In the case of the £5m business-owning partners in our example, they would both need to take out a life cover policy for their respective business partner for the amount that their portion of the business would be worth. If they were joint, equal owners, this would be £2.5m each. This would then be paid out as a lump sum, via a suitable trust arrangement, if their business partner died so they would have the funds to buy up the shares the deceased had left to their beneficiary, usually their spouse or a family member.
For existing policies, it’s important to keep reviewing this life cover policy and update it to reflect the value of the business as it grows, otherwise you might face the risk of a shortfall between what the policy pays out and the current value of the business shares.
To ensure that the business continues to operate in the most consistent way possible, it’s also advisable to couple a shareholder agreement with a cross-option agreement. A cross-option agreement is a legally-binding contract which can provide that the beneficiary who has inherited the shares must sell them to the business, and/or that the business must buy them. This would ensure that the company is protected against a potentially inexperienced individual having the right to join or influence the direction of the business.
Putting the Protection in Place
Making sure you have the right protection around your business is vital to ensure its continuity and to safeguard all your hard work and effort. It’s often easy to overlook as the day-to-day demands of the business constantly compete for your attention, but setting some time aside to protect yourself and your business doesn’t just provide peace of mind, it ensures your business legacy remains intact whatever life throws at you.
While we can help you meet all your financial planning demands, we also work closely with specialist lawyers who can put the necessary legal structure in place to support and protect you and your business. If you’d like to discuss your needs further, please get in touch, we’d love to help.