How can I protect the money in my business?
In this guest blog post Tim Mullock of Adept Asset Solutions shares his advice on how you can protect the money in your business. As a leading expert on all matters concerning Wills, Estates and Asset Management I’m sure he will provide you with some food for thought.
Firstly, give yourself a pat on the back! You and your business have beaten the odds and become successful, and that’s no small thing, particularly over the past couple of years (how has it actually been that long?!) of the pandemic.
But in all seriousness, we may have to embrace the cliche that the pandemic has proven: you genuinely never know what could and might happen, even in the world of the “new normal”, so it’s best to take some time now to plan for the potential curveballs life may throw at you.
Let’s take a look at Barbara and Elizabeth. Best friends since school, these ladies set up an interior design business together after their children went off to university. They have an equal stake in the business and have been working successfully together for about 10 years. In those 10 years, the business has expanded and now includes workshop premises, a display studio, and five employees.
Things are going well, until Barbara is tragically killed in a traffic collision. Now not only does Elizabeth have to cope with the death of her best friend, but she also has to deal with the potential fallout in the business side of things. You see, while Barbara and Elizabeth had spoken vaguely about what they would do with the business when they each wanted to retire, they had judged that would probably happen another 10 years down the line, and they could work out the specifics later on.
But now Barbara is gone, and as the partners hadn’t put any plans or protections in place, Barbara’s share of the business will go to her default beneficiary: her husband, Paul.
Paul has recently retired from his work as a mechanic, but he’s not quite ready to put his feet up, and he wants to help nurture the business that Barbara put so much time and effort into. He decides that rather than hand over the reins to Elizabeth completely, he’ll fill Barbara’s place as a co-owner and continue her work.
However, although Paul and Elizabeth have always got along well, Paul is not an expert in interior design. He thinks it’s just picking out paint colours and scatter cushions, and he doesn’t have the appreciation for design that Barbara had, and he’s not really interested in learning about it. To him, it’s just a hobby that his wife played with after their children grew up and left the family home. To Elizabeth, it’s her entire legacy, and it’s difficult to see half of that legacy in the hands of someone who says “you want to pay how much for curtains?!”
Paul’s disdain for the industry, and interference with the daily runnings of the business is making Elizabeth and the employees miserable, and it’s having an impact on their clients and potentially the value of the business. Elizabeth doesn’t want to sell her half of the company and start again on her own, and she doesn’t want to upset Paul by asking him to leave; after all, he has an equal stake in the business, which he doesn’t have to sell.
Elizabeth is now trapped between the proverbial rock and hard place. But this scenario isn’t inevitable: there are protections and agreements between business owners and shareholders that can be put in place in order to mitigate these consequences. Below, we’ll take you through what can be done.
Firstly, let’s get your business protected
If your business involves a partnership (in this instance, we’ll consider the partnership a 50/50 split of ownership) then you’ll want to have a business will.
This can help the process of transferring business assets to your chosen beneficiaries without causing serious problems for the surviving business owner and shareholders.
A business will is a written agreement as to how you and your partner(s) want the business to be managed in the event of your death.
Without a business will, the shares and potential control of the business will go to the deceased’s estate (whose beneficiaries are usually a spouse and/or children).
This could have a huge impact on the value of the business, particularly if you are/were a key person in the running of the organisation, and your spouse knows little about the business or has no interest in it.
Business Will vs Business Trust
Let’s quickly define the difference between a business will and a business trust. A will is a legal document that speaks from the point of your death. A trust can be created either in a will or during your lifetime. Both a will and a trust are a statement by you as to how monies are to be applied. However, a will is about the distribution of assets after your death, whereas a trust is about the control of your assets and money.
It is generally “tidier” to put your business assets into a business trust, rather than to include everything within your personal will.
Cross option agreements (right to buy and right to sell)
Also known as a double option agreement or put and call agreement, a cross option agreement is an accord entered into by all shareholders of a private limited company, under which each shareholder grants to the other shareholders put and call options over their shares, which are exerciseable on death.
This agreement binds the continuing owners of a business to purchase a departing owner’s interest on the happening of a specific event. The events that trigger the cross option agreement are commonly the death or the total and permanent disablement of one of the business owners.
Essentially, this allows the surviving owner(s) to buy out the deceased’s beneficiary for a predetermined sum of money.
Without proper planning, both your business partner or your beneficiaries could lose valuable tax reliefs and protection from life’s everyday problems. It is always worth consulting an expert in wills and trusts to ensure that your wealth is protected as fully as possible now and for generations to come.
If you’re thinking of selling your business with a view to investing the proceeds then you might find this blog is of interest.
Tim Mullock is a leading expert on all matters concerning Wills, Estates and Asset Management. He enjoys many years’ experience in helping people to manage their assets for the best interests of those who, one day, they leave behind. You can find out more by visiting his website adeptassetsolutions.co.uk
