Business protection The cost of unprotected success.
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Transcript of Business protection The cost of unprotected success.
Business protection
The cost of unprotected success
A true story
C&C folded year after
founder’s crash death
Training group Carter & Carter has gone to the wall less than a year after it’s founder was killed in a helicopter
crash……
….C&C has struggled to cope since his death
Share price
April 2007 £12.75
Co value £500m
October 2007 85p
(shares suspended)
Administrators went in in April 08
Managing Director / CEO
• Direction & vision
• Entrepreneurship
• Boardroom cohesion
Creditor
confidence
SME
Owner / Managed Business
Who needs it?
• No “substitutes bench”
• Limited market for shares
What are we going to talk about?
We really couldn’t do without him….
• Finding a replacement
• Dealing with the family
• Understanding banks, creditors and customers
• Retaining control of the business
• Providing fair value for the estate
Silos – typical SME
Vision
Direction
Leadership
Board cohesion
Bank confidence
Alan
Managing
Director
Connections
Product and
market
Negotiating
Team leader
Exports
Anne
Sales and
marketing
Research and
development
Quality control
Buying
Projects
Team leader
Frank
Technical
Director
Losing Frank – the fallout
Vision
Direction
Leadership
Board cohesion
Bank confidence
Alan
Managing
Director
Connections
Product and
market
Negotiating
Team leader
Exports
Anne
Sales and
marketing
How will theysource a
replacement?
How will they
support
the family?
What will happen to the shares?
What are the financial
consequences ?
How quickly can they source a replacement?
• Notice period • Head hunter costs • Relocation costs• Share option buy out• Package:
– Car lease– Salary / pension– Bonus
3 months
£15,000
£30,000£20,000
£5,000£60,000£20,000
£150,000
Losing Frank – the fallout
Vision
Direction
Leadership
Board cohesion
Bank confidence
Alan
Managing
Director
Connections
Product and
market
Negotiating
Team leader
Exports
Anne
Sales and
marketing
How will theysource a
replacement?
How will they
support
the family?
What will happen to the shares?
What are the financial
consequences?
How will they support the family?
Emotional & practical
• Bereavement counselling
• Answer questions and give advice
• Discuss treatment plans
• Provide practical support for the
family
Financial support
• Can the company afford financial help?
Losing Frank – the fallout
Vision
Direction
Leadership
Board cohesion
Bank confidence
Alan
Managing
Director
Connections
Product and
market
Negotiating
Team leader
Exports
Anne
Sales and
marketing
How will theysource a
replacement?
How will they
support
the family?
What will happen to the shares?
What are the financial
consequences?
What will the ……. competition be doing today?
• Contacting key customers?
• Approaching key staff?
• Fuelling rumours?
• Approaching the estate?
Financial consequences
How will the ……. staff feel today?
• Worried?
• Loss of morale?
• Looking for other opportunities?
• Be open to an approach from competitors?
Financial consequences
How do the……. customers feel today?
• Will they remain loyal?
• What happens if quality and service levels fall?
• What will be the effect on turnover?
• How will the company meet its fixed costs?
Financial consequences
How does the……. bank manager feel today?
• Attitudes changing in the credit crunch
• Banks looking to re-build capital
• Will, or can the bank fund cash-flow shortfall?
• Will they call in overdrafts?
• If they lend, will they require personal security?
Financial consequences
How do ……. trade creditors feel today?
• Will they reduce or withdraw credit terms?
• Can they still get creditor insurance?
• Could they cease supplies?
Financial consequences
How do ……. trade debtors feel today?
• Could be ex-customers
• If so are they likely to pay quickly?
• If not how will this affect cash flow?
Financial consequences
What will ……. the executors of the estate be doing?
• Director loan accounts may need repaying
• Outstanding salary and bonus needs to be paid.
• Dividends may need paying
Financial consequences
The vicious circle of doubt
CREDITORS
BA
NK
DEBTORS
££ COVER
No cash
flow
Vision
Direction
Leadership
Board cohesion
Bank confidence
Alan
Managing
Director
Connections
Product and
market
Negotiating
Team leader
Exports
Anne
Sales and
marketing
How will theysource a
replacement?
How will they
support
the family?
What will happen to the shares?
What are the financial
consequences?
Losing Frank – The Fallout
Who inherits the shares?
• Spouse / partner?– How will they convert the shares to cash?
• Children?– If under 18 who represents them?
– If 18+ but lacks maturity?
• Majority or minority
The minority shareholder
What powers does the estate have?
• Little or no power
• No market
• No guarantee of income
The majority shareholder
What powers does the estate have?
• Appoint themselves as directors
• Remove other directors
• Control dividend strategy
• Sell control to a third party
– Subject to the articles
Articles of Association – best sales aid?
• Pre – emption rights?– Must offer to existing shareholders first
• Value clause– How will the shares be valued?
BUT – Where does the money come from?
Succession planning
• Without a properly funded “business will” you cannot be certain there will be:
1. CONTROL for the remaining shareholders
2. FAIR VALUE for the estate
Solutions
The cost of unprotected success
Solution 1
Insures
Key Person Solution
In the event
of death,
critical illness
& disability
Recruit replacement
Replace lost profit
Repays loans
Helps family
Cash
Helping Hand
• Working Transitions – Helping Hand– Temporary replacement in 48 hrs
– Assistance with sourcing permanent replacement
– Legal assistance
• Red Arc – Helping Hand– Nurse advisor
– Bereavement counselling
– Additional medical assistance for critical illness
Cross
option
agreement
Solution 2
Business trust
Tax free
benefitIn the event
of death
Fairvalue
control
Shares
Shareholder protection solution
Solution 3
Insures
Dependant’s solutions
In the event
of death
cashd
iscr
etio
nar
y
trust
depe
ndan
ts
Group life cover
The normal employee group scheme
Not available on single life basis
Single lifeRelevant life
policies(RLPs)
Excepted Non-excepted
Registered Non registered
Single Life Death in Service
Unattractive tax regime
Bright grey – only company offering on a stand alone basis
Relevant life policies
• Cost is paid by the employer
• No tax or NIC charge on the employee
• Possible tax relief on premiums
• Benefits paid (usually) tax free under a discretionary trust
• Does not form part of pension lifetime or annual allowance
How much tax is saved?
PaymentEmployees NIC @ 1%Income Tax @ 40%Employers NIC @ 12.8%Total gross cost
£1,00017
678 217
£1,912
Allowing for Corporation Tax on BIK / NICs
21% CT rate gives net cost of29.75% CT rate gives net cost of28.0% CT rate gives net cost of
£1,5101,3431,377
Assumes cost of life cover is £1,000 for a 40% tax paying director,
but treated as a benefit in kind for income tax and NICs.
Tax Rates applicable 2008/9
How much cover ?
• Replacement costs £ 150,000
• Director loan account £ 50,000
• Bank loans & overdraft £ 200,000
• Contribution to gross profit £ 250,000
• Value of shares £ 250,000
• 4 x remuneration DIS £ 300,000
Solution 1
Key Person cover
Solution 2
Share Protection
Solution 3
Death in Service
Possible total £ 1,200,000
Rewards for you?
Average AP per cover £1,250
Average covers per business
4
Total AP per business £5,000
Your Earnings ?? £8,000+
Rewards for you?
And….
Rewards for you?
Bright Grey has just increased commission for Bankhall members
by 2.5% LAUTRO for full earnings period
Summary
• 3 simple solutions will fit most businesses
– Only the minority of cases get complicated
• Bright Grey specialises in business protection
– Specialist sales team
– Specialist admin team
– Specialist underwriters (contactable)
– Specialist products
– Price match for large cases (£200+ per month)
• Professional training from experts
– Masterclasses being run throughout the UK
– One size-does-not-fit-all
– Tailored solutions to different needs
Are your clients indulging in unprotected success?