THE IMPORTANCE OF BUSINESS PROTECTION
THE IMPORTANCE OF BUSINESS PROTECTION TODAY’S LEARNING OUTCOMES • How to keep control of a business should a partner or shareholder suffer a critical illness or die. • How to protect a business against the sudden and unexpected loss of a key employee. • Relevant life plans and how they can help provide financial security to an employee's dependents. • We’ll do this by looking at 10 key questions . • But first, lets start with an example…. 2
EXAMPLE ABBEY NAVIGATION SERVICES LTD • Alan Managing Director 52% • David Technical Director 24% • Anne Sales Director 24% • Net asset value £100,000 • Gross profit £500,000 • Net profit before tax £150,000 • Value £1,000,000 3
CONTROL Shareholding Level of control 0-25% Virtually no control Minority shareholder rights only 26-49% Limited ‘nuisance’ value Can block special resolutions 50% Balance or deadlock Depending on relationship 51-74% Working control Controls dividends and director appointments 75-100% Total control Change Articles, sell company, wind up, etc. 4
QUESTION 1 WHO DOES THE FOUR KEY BUSINESS FUNCTIONS? Who’s responsible for… • Leadership • Financial control Who’s on the • Production subs’ bench? • Sales 5
QUESTION 2 HOW DO YOU FIND ANOTHER ALAN? An example of the kind of costs that could be involved • Time 6-12 months • Head hunter costs £15,000 • Relocation costs £30,000 • Share option buyout £20,000 • Package • Car lease £5,000 • Salary/pension £60,000 • Bonus £20,000 £150,000 These figures are estimates – costs can vary greatly. 6
QUESTION 3 WHAT ARE THE FINANCIAL CONSEQUENCES? How do your • Customers • Competitors • Trade creditors All feel today? And what will they do in their own interests? 7
QUESTION 4 HOW DO YOU GET ON WITH YOUR BANK MANAGER? How does your bank feel today? • Who will you be dealing with? • Your manager or the recovery team? • How secure is your overdraft? • How will you service your loan? • If they lend, will they require personal security? • Will this be retrospective on existing borrowings? • Second charges don’t die with the director. 8
QUESTION 5 WHAT DO THE EXECUTORS WANT? • Outstanding salary/dividends • Director/partner loans • Return of pension fund • Property pregnant SIPP/SSAS • The business share • What’s in the will? 9
QUESTION 6 DO YOU HAVE A ‘BUSINESS WILL’? Articles of Partnership Association Agreement Abbey Navigation Services Limited Abbey Navigation Services Company Number 03456789 10
QUESTION 7 DOES IT ENSURE FAIRNESS FOR BENEFICIARIES? Anne was a minority shareholder • Little if any power • No market • Surviving directors can revert to salary basis • No guarantee of income The estate’s problem. 11
QUESTION 8 HOW DOES IT KEEP CONTROL OF THE BUSINESS? Alan was a major shareholder • His widow can appoint herself (or nominee) as director • She controls dividends • She may want to sell the shares • If so, to whom? At what price? • Sell to a competitor? • Are there any restrictions in the articles? 12
QUESTION 9 WHAT’S IN THE ARTICLES? • What restrictions are there? • Pre-emption rights? • Must offer to existing Articles of shareholders first Association • Value clause • How will the shares be valued? But where does the money Abbey Navigation Services Limited come from? Company Number 03456789 13
QUESTION 10 HOW WILL YOU LOOK AFTER THE FAMILY? • Do directors have dependants? • Do they have life cover in place? • How are they paying for it? • Do they want to save tax? • Do they want to put it through the company? Relevant life plans Single life death in service 14
RELEVANT LIFE PLANS TAX EFFECT Premium now paid by company £1,000 £1,000 Assumes 40% tax-paying 49% employee and 19% corporation tax-paying Company gross cost company. Employees National Insurance *Corporation tax relief on contribution @ 2% 34 0 relevant life plans assumes Income tax @ 40% 690 0 payment is acceptable to saving Employers National Insurance local tax inspector as contribution@ 13.8% 238 0 trading expense. Total gross cost to company £1,962 £1,000 Tax rates 2018/19. Company net cost Corporation tax relief at 19% 373 *190 Net cost of £1,590 £810 15
OK, WE LIED QUESTION 11 Are your clients indulging in unprotected success? 16
THE IMPORTANCE OF BUSINESS PROTECTION LOOKING FOR MORE INFORMATION? • Send us a question now (we’ll do our best to answer them). • Our website has lots of useful information, including our business protection planner toolkit - adviser.royallondon.com/business. • Contact your usual Royal London sales consultant. • Contact me - david.dawson@rlisales.com or 07919 170171 . 17
The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London EC3V 0RL. November 2018 PRP8PN0124
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