Wealth planning for business owners

It’s important for business owners to protect their own wealth as well as that of their company. Andrew Dixon, Head of UK & International Wealth Planning at SG Kleinwort Hambros, explains how.
 

Running a business can be all-consuming. It’s easy to delay taking the steps necessary to look after your own wealth while you’re busy scaling your company. Business protection insurance, a pension plan and a strategy for succession should all be considered to help keep your financial ambitions on course.

Andrew Dixon, Head of UK & International Wealth Planning at SG Kleinwort Hambros, says: “Creating, building and running a business can be an emotional rollercoaster, business owners can be guided by their emotions when making financial decisions outside of the business as well. It can be extremely hard to take the emotion out of these decisions as financial goals are an intrinsic part of your life and family. That’s where a Wealth Planner can come in and provide clear guidance and logical clarity.

Dixon says, “it is natural for business owners to prioritise their business above all else and that he and his team are there to ensure their other financial goals are not neglected”.

“Sound financial planning means personal financial goals are not at cross-purposes with the growth of the business. Rather the two work in tandem to secure the business, diversify overall wealth and maximise opportunities,” says Dixon. One advantage of being a business owner is flexibility over how you pay yourself, he says.

Owners can take profits from the business using the most tax-efficient method, whether that’s a salary, dividend, or contribution to a pension fund. The upside of investing profits in a pension scheme is that you don’t pay tax on it immediately.

Pension schemes for business owners

Some owners rely on the eventual sale of the business to fund their retirement. But you should always have a plan B and it is worth considering the benefits that pensions offer.

“Self-Administered Pension Scheme’ (SSAS), businesses can potentially receive corporate tax reductions on the cost of running such schemes and it also allows members to have control and flexibility over what they invest in”, Dixon says.

Such schemes generally have no more than 11 members and are usually set up by directors. They are potentially open to family members, even if they don’t work for the business, and can be part of a succession plan under current legislation.

How do I future-proof my business?

If you run a company with a business partner, it’s wise to have plans in case one of you dies. The deceased person may drive the profits or have knowledge and experience vital to continued success. 

Key person insurance can protect your business by paying out a lump sum if the named individual dies. Some providers also offer this for critical illness.

Dixons says: “You want to be able to generate liquidity that will see the business through for a period of time, so it doesn’t fail.”

You also need to think about what happens to the ownership if your business partner dies. Dixon explains that shares often pass to a spouse, who may know little about the business.

“What you want to do is give the surviving business owner the liquidity to buy out the spouse,” he says.

Life insurance that pays out on the death of an owner is one way to ensure cash is available to buy out a surviving spouse.

When should I pass on my business or retire?

When you stop working will probably depend on what type of business owner you are. There are people who devote their working life to growing and selling one business, as well as family business owners and serial entrepreneurs.

If you have always intended to sell your business and use the proceeds as your pension, you will probably do this in your 50s or 60s. But you have to be certain you will make enough from the sale to live off. A Wealth Planner can help you calculate how much income the lump sum will generate and how much you will need.

Serial entrepreneurs, on the other hand, may never want to stop working. They often look at a five- to seven-year time horizon for selling a business and then start something new.

Dixon says it can be hard to persuade entrepreneurs to use pensions and Investment Savings Accounts (ISAs). They can have a higher expectation of returns from passive income, probably because of the returns they’ve generated from their own businesses.

There's a lot to be said about educating people on the merits of compounded long-term returns from passive investment” he says.

If your family has owned a business for generations and your children expect to take the reins, the timing of succession will often depend on when they are ready. Will they join the business at 18, go to university or work elsewhere first?

Things can become complicated if one child takes on the business and the others don’t want to become involved. From a succession point of view, it can then be difficult to hand down equal shares if one child is driving the business’s fortunes. However, if the business represents most of your wealth then how do you equalise what you give to the children? Dixon says: “It is possible, but you need to engage with all stakeholders and have a well thought through plan to avoid family disputes.”

How can wealth planning help business owners?

When you’re tied up running a company, it can be hard to find time for your personal finances. A Wealth Planner can help you create a plan that ensures you secure your business and take the right steps to protect and help to grow your wealth. This will provide peace of mind that all your hard work will reap the rewards it deserves.