Private & Family Owned Businesses

Private and family businesses are of immense importance to the Australian economy
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Private & Family Owned Businesses

Private and family businesses, their owners and their families are of immense importance to the Australian economy. Valued at $4.5 trillion and employing more than half of all Australians you are a hot-bed of innovation and commercial risk-taking. In an uncertain economic and business environment, who are you able to turn to?

Whilst Granite Financial Services is a financial planning business, by virtue of the breadth of our professional experience there is much more that we offer to the private or family business owner. Consider the following issues which are all resolvable with the right professional advice.

Growing your wealth

As a business owner your intention is to grow your wealth primarily through growing your business. But there is much more to this than the next sale as borne out by comments we hear from clients.

Business structures

When starting a business the priority is, understandably, to generate sales and sometimes the appropriateness of the legal and financial structure is not a priority. As a business matures and there is significant net income the limitations of the structure becomes more evident.

Family businesses

Where the passion and commitment of family members is harnessed family businesses often outperform other business models.

Governance

Where the passion and commitment of family members is harnessed family businesses often outperform other business models. However, where the business and family participation grow appropriate governance structures are needed to ensure performance is maintained and all that you have built is protected.

Exiting your business

For some this will be a once in a lifetime event and the culmination of a life’s work. We recognise that it can be a daunting prospect and there can be many pitfalls to a successful sale.

Passive investment

Many business owners invest in assets such as commercial and residential property and Australian shares in order to grow their wealth. Whilst many do well out of these strategies, we do see many instances where returns have been sub-optimal.

Risk management

Your business and family face many risks on a daily basis. These can be categorised into the following: Business, Financial, Investment, Personal

Business Succession & Estate Planning

Business succession is very much a journey rather than something you must consider near the end of your business career.

Retirement planning for business owners

A parallel superannuation system was created for small business owners in recognition that they will reinvest profits back into their business rather than into superannuation.

Growing your wealth

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As a business owner your intention is to grow your wealth primarily through growing your business. But there is much more to this than the next sale as borne out by comments we hear from clients such as:

  • We are generating more sales but not more profit
  • We are generating more profit but not more cash
  • We have hired more workers but we are feeling more stressed than ever
  • We feel like we have “hit a brick wall”

Growth may also come through acquisitions. It has been estimated that approximately 80% of business owners will retire in the next ten years. It is possible that this significant increase in supply of businesses for sale could push prices down and give rise to some attractive acquisition opportunities.

Passive investments

Many business owners invest in assets such as commercial and residential property and Australian shares in order to grow their wealth. Whilst many do well out of these strategies, we do see many instances where returns have been sub-optimal due to:

  • No clear investment strategy
  • Lack of diversification across assets
  • Assets held in wrong type of entities (leading to tax inefficiency)

Investment markets continue to be volatile and it is easy to become unsettled and risk averse. At the heart of successful investing is understanding what options are available to achieve your goals within a risk setting that you are comfortable with. Diversification across asset classes is key and we will demonstrate how and why.

Notwithstanding our belief in diversification, we also recognise that some clients have a particular preference and comfort with certain assets or asset classes. Whether that is direct property investments or a concentration in Australian equities, our role is to make sure you get the best possible advice to achieve your goals within your risk settings, whilst acknowledging your preferences.

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Business structures

When starting a business the priority is, understandably, to generate sales and sometimes the appropriateness of the legal and financial structure is not a priority. As a business matures and there is significant net income the limitations of the structure becomes more evident. However, it is sometimes not easy to update structures and so we always encourage clients to think through the effectiveness and flexibility of their structure in terms of their medium term aspirations.

The key objectives of business structures generally fall into one or more of the following:

  • Protect assets from litigation and family breakdown
  • Flexibility to direct profits to where they are most needed within the business or family
  • Facilitate the raising of capital and the introduction of new shareholders
  • Matching the right structure for the characteristic of the asset in question

When considering legal structures it is also usual to consider the nature and positioning of any debt funding to ensure the after tax cost is minimised and appropriate security is accessed. Self-managed super funds can give business owners valuable options for the holding of certain passive assets such as property. However, they are not for everyone as they involve a higher level of complexity and responsibility.

Risk management

Your business and family face many risks on a daily basis. These can be categorised into the following:

  • Business risks (e.g. deciding to launch a new product or enter a new market)
  • Financial risk (e.g. cash flow management, financial leverage, interest rate and currency risk)
  • Investment risk (e.g. buying a commercial property)
  • Personal risk (e.g. injury, illness, general health and personal relationship)

Where death, injury or illness have the potential to impact upon the cash flows of the business or even the viability of the business, the financial effect of these risks might be mitigated through insurance such as life, TPD, trauma and income protection.

Where shareholders of a business are not closely related, consideration should be given to what would happen if a shareholder were to die or become permanently incapacitated.

Often the partner, typically a wife, is not in a position to step into the husband’s shoes and nor do the remaining shareholders want this. What is usually needed is an orderly transfer of the shareholding to the remaining shareholders at a pre-determined market price, and in a pre-determined time frame funded by proceeds of an insurance contract. All parties are able to move forward without delay, acrimony or significant legal costs.

We also encourage clients to give some thought to whether long standing senior employees have adequate personal insurances so as to avoid a situation where you might feel morally obliged to assist them and/or their family in the event something unfortunate happens to them

Family businesses

Where the passion and commitment of family members is harnessed family businesses often outperform other business models.
However, sometimes the family dynamic can adversely impact on the business, and/or the business dynamic can adversely impact on the family, especially where second, third and fourth generations join the business.

Consider the characteristics of the two environments in the following diagram:

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The iceberg effect is very apt in these circumstances;

what you observe in terms of conflict or dysfunctional is often only a fraction of what is really going on under the surface.
Don’t let your business become the Titanic!

Governance

Appropriate governance structures become necessary as businesses grow. Although these can take many forms, they will be of little benefit if family members do not share the same vision and values.

Some of the governance structures that might be important include:

  • Family council
  • Family deed
  • Shareholders agreement
  • Shareholders Buy/Sell agreement
  • Company board
  • Role definitions for all employees, including family members
  • Alignment of remuneration structure with role; example, CEO’s with meaningful equity participation

These can help provide stable leadership and manage expectations of family members.

Business succession & estate planning

Business succession is very much a journey rather than something you only consider near the end of your business career. It can mean different things to different business owners and families. At its most basic, businesses are either sold to a third party, sold/transitioned to one or more family members or closed.

Some of the most difficult issues in business succession relate to family members more so than finances. The governance structures described above can be constructed in a way so as to manage expectations of family members over time, particularly processes around role definitions, performance measurement and promotion.

Estate planning is very important but is only one mechanism by which ownership of a business can be transferred.

Often it is required to equalise financial outcomes taking into account a wide variety of financial and family situations that have come before it. The advent of blended families has made this task yet more difficult which is why specific expertise is often required.

Exiting your business

For some this will be a once in a lifetime event and the culmination of a life’s work. We recognise that it can be a daunting prospect and there can be many pitfalls to a successful sale. We have seen many failed attempts by business owners to sell their own businesses and would encourage you to at least consider utilising the services of an expert. After all, very few people attempt to sell property themselves, and your business is a far more complex asset.

Having decided to sell you are now managing the business to maximise sale price which means understanding what potential buyers are looking for is paramount. What attracts them to your business may be different to what you value in the business.

There are many ways to maximise value; most focus on increasing revenue or reducing costs. The third is to increase the “multiple” of earnings which is paid by improving the “quality” of those earnings through reducing risk.

A professionally run sales process usually includes the following steps:

  • Grooming the business for sale
  • Retirement planning strategy before sale to remove angst
  • Pre-vet buyers
  • Professionally prepared/presented marketing document (Information Memorandum)
  • Competitive sales process – price tension and terms
  • Negotiate the price – understanding the value to the buyer is key
  • Negotiate terms

Retirement planning for business owners

A parallel superannuation system was created for small business owners in recognition that they will reinvest profits back into their business rather than into superannuation. As a consequences there are a number of CGT concessions available upon the sale of a “small business” – where turnover is less than $2m or net asset value is less than $6m measured at the shareholder level.

Under the 15 Year Exemption the entire proceeds are tax exempt and $1.415m from 1 July 2016 (indexed annually) per person can be immediately contributed into superannuation, in addition to the usual concessional and non-concessional contributions. Other exemptions are the retirement exemption, active asset exemption and various rollovers.

Whilst these exemptions can be complex and care needs to be taken, they can have a material impact on your retirement planning.

Constructing a portfolio to fund retirement should be seen as fundamentally different to building wealth during your business career. Managing risk and focussing on income through a highly diversified portfolio is key to ensuring that your retirement income stream is robust over time.

Business Owners & Private Clients

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