Achieving financial security for your business and your family is a priority for many business owners. But people often don’t know what type of protection is right for them and how not having this in place could have an impact on their family’s financial security should the worst happen.
Here, Mike Wardlaw, a Financial Planner from Tilney, Edinburgh, outlines a real-life client scenario, where he worked with two company directors. He reviewed their needs and with careful planning, ultimately provided financial security for the business and their families. Mike specialises in financial planning for business owners, family businesses and senior executives.
I first met with Linda and Gail* in 2003. They had set up their own successful marketing agency and were both company directors. They were in their mid-forties and had a vision for the company.
We met to discuss investing surplus business profits but over the years, I introduced them to what I call a considered and constructive approach to financial planning, which links your business and your personal wealth together.
I carried out a full review of their business protection needs. When I first met Linda and Gail, there was existing key person protection in place for both of them. I reviewed the policy and left it in place as the level of cover was suitable, the terms were appropriate and the premium was affordable. As the name suggests, key person protection is taken out by a business on the key people who contribute to the success and profitability of that business. In the event of the insured person’s death or critical illness, a cash lump sum will be paid to the business to cover any resulting loss of profits. This injection of cash can also support short term costs, such as recruiting a replacement.
They had no company debt, so no recommendations were made regarding loan protection.
Finally, I reviewed their shareholder protection needs and could see that this was required as well as key person protection. On the recommendation of their accountant, they each owned 30% of the company’s shares with the remaining 40% being split between their husbands (20% each). Neither one of their husbands had any involvement in the company.
I recommended shareholder protection to alleviate any potential risk to the company and to Linda and Gail’s families. On the death of a shareholder with no shareholder protection in place, shares in the company are automatically passed to their next of kin. If the next of kin is not involved in the business, this could be problematic. The recipient may not want to be involved in running the business or if they do, the remaining shareholders cannot stop this. The recipient could also potentially sell their shares to a competitor. There is also the risk that they will not receive a fair price for the shares.
Shareholder protection alleviates this risk by providing the remaining shareholder(s) with the money to buy the inherited shares from the deceased’s beneficiary. The succession planning for the business has been put in place, and this is known as the ‘Business Will’. There is no uncertainty – the beneficiary will receive a fair value for the shares sold and the surviving shareholders have the money to buy the shares.
Over the next few years, I continued to work with Linda and Gail and provided financial planning advice for the business. The business continued to grow with a turnover of £5 million and they achieved good profits. At this stage, we started looking at a business exit plan to be implemented over the next three to five years.
Working with Linda and her family
Sadly, before we could fully implement the business exit plan, Linda was diagnosed with terminal cancer at the age of 54, four years after putting the shareholder protection plan in place. Her main concern was to see that her husband, Peter, and their two adult children were financially secure, as she had always been the main breadwinner and dealt with their finances. I met with Linda and her family to discuss this and was appointed as their personal financial planner. We established that Peter would receive £2 million in exchange for his and Linda’s shares in the business on her death.
I worked closely with Linda and Peter to create a financial plan so that he would not run out of money in his retirement. The starting point in drafting this plan was to use cashflow modelling. This provided a clear vision of their financial future, helped them to agree the value of their share of the business and gave them reassurance that their long-term goals were realistic and achievable. We also consolidated other investments and pensions and managed them in a way that was in line with their long-term financial objectives.
Linda had been contributing to a pension, which was valued at £300,000. This was written into trust and she was able to pass this free of Inheritance Tax to her children. They used the money to purchase buy-to-let properties. I put them in touch with an accountant, solicitor and also a mortgage adviser and they now have their own buy-to-let businesses. This was Linda’s wish for them.
Linda died less than 12 months after her initial diagnosis. By having the relevant business protection in place and through thoughtful and careful planning, we transferred her business wealth into long-term financial security for her family, giving her peace of mind at a time when she needed it the most. I continue to meet with Peter regularly to make sure his financial needs are met.
The business was also secure. On Linda’s death, a lump sum was paid to the company under the terms of the key person insurance and Linda and Peter’s shares were passed to Gail. Gail continued to proceed with the business exit and I guided her throughout this process. I still advise her on her personal finances to this day.
About the Authors – If you have any questions about protecting your business and financial security, contact Alison Fitzsimons at Tilney now. You can call them on 0333 014 5429 or email firstname.lastname@example.org.
*Names changed to protect anonymity.
This article does not constitute advice or a recommendation and you should not make any financial decisions based on its content.
You should always remember that a protection policy will end if you do not make payments and there will be no cash value unless a valid claim is made.
Issued by Tilney Financial Planning Limited. Authorised and regulated by the Financial Conduct Authority.