Financial Focus On..."Now Get Out of That"
19th June 2017 by Robin Beadle
For those of the younger generation without long memories, “Now Get Out Of That” was a BBC series in the early 1980s that tasked teams of individuals with various tasks and problems in order to reach a location or solve a puzzle. The solutions to the individual problems were often surprisingly simple and usually relied on the teams asking the right questions in order to find the best solution.
The same approach of asking the right questions in your longer-term plans should be applied to businesses when considering things that may, at the moment, appear some distance in the future. Here I am referring to matters such as succession planning, retirement and “what if” scenarios. By considering matters early, it is usually far easier to avoid pitfalls.
Longer-term retirement and succession planning generally boils down to a couple of questions such as “When do I want to retire?” and “What do I want to do with my business?” The first sets a time frame to think about whilst the second starts asking the right questions such as whether you have family members to pass the business to (and then potentially draw-down a future pension from the business); whether you foresee having to sell or liquidate the business; or whether you see yourself winding down the business and taking part-retirement whilst still allowing the business to tick along to provide a part-time income. Sometimes the nature of the business itself will dictate or limit your choices and in other circumstances, the lack of suitable successors may preclude some options. By thinking about things sooner rather than later, you can have a good idea which way you may decide to go, even if matters are not completely set in stone.
The next thing to look for is any pitfalls. Tax legislation can and often does vary from year to year but there are some basic principles that largely remain constant. For example, is the business in a form where it has a mix of “trading” and “non-trading” activities (such as owning investment properties) as leaning too far in one direction might affect an important tax relief. If there is a potential issue, is there another structure or way to split the business into component parts that would still allow you to continue to operate in a similar way but remove the threat to future reliefs? When is a good time to admit a new partner, or potentially could you assist your senior staff in structuring a future Management Buy Out? The scope of questions you need to ask is way too great for this article but if you are now thinking of what you might be looking to do, say, ten years in the future, then you have already made a start.
The other side to long term planning is to consider what would happen if something untoward happened tomorrow. For example, if you are in business with your brother on an equal footing, what would happen to your business were your brother to suddenly pass away, or become divorced? The vast majority of businesses still grow organically without any particular formal structure. A formal structure that considers these problems may grant those continuing the business the right to buy out your brother’s share (for example, via the formal partnership agreement or Memorandum and Articles of Association for a Limited Company). Without these safeguards in place, in this example your brother’s share of the business may pass to his (ex?) wife under the terms of his Will or the divorce settlement. Your (ex) sister-in-law (in this example) may not be the best person to work with, or have the best interests of the business at heart.
Whilst you cannot provide for every contingency, taking advice and considering both in what framework the business currently operates in and what has been agreed between those who own the business in the event of a break-up or sudden enforced change of circumstances will enable you to plan ahead and not be left with the feeling of “Ah, now how do we get out of that?”
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