Financial Planning for Small Business
Put simply, financial planning for small business is about all of the foreseeable and unforeseeable “what ifs” of a business. It asks the confronting and sometimes difficult questions like:
- Do you as the primary business owner / operator have an exit plan?
- Would the business suffer financially if it lost any of its key people?
- Would you want any owners’ spouse to remain in the business if one owner died or became disabled?
- If one business owner suffered a critical illness, or early death, have you planned how you would fund the purchase of their share of the business?
- Do you have a business will (shareholder agreement) to ensure succession of your business should anything happen to any owner; and have you taken into account the tax implications of this event?
- Is the succession or exit plan for your business fully documented, signed off and known to other stakeholders?
- Is there a regular review timetable for valuing the business and making adjustments to the succession plan when necessary?
There is an estimated 2.7 million small businesses in Australia and a significant number of these establish loans (often secured against the family home), to establish or grow their business. Often there will be a suite of insurances in place for events outside of their control such as flood, fire, theft or public liability; but they will not have adequate protection against a personal event.
“Yes but we have a life cover contract”… is a common response. But what about a trauma, serious illness or accident which could curtail or even end the stakeholder’s active participation in the business. Remember that statistically, an individual is far more likely to suffer a serious illness or disability than to die prematurely. Without adequate protection against these contingencies, the family home is sometimes at risk.
Some of the existing shareholder agreements are little more than “back of the envelope” efforts, which do not cover the wide range of contingencies that can come into play. They do not consider the tax implications of the trigger events and can therefore deliver outcomes that are distinctly different from that which was originally intended. Essentially they are the ticking time-bombs of small business.
It follows that there is sometimes legal action by the aggrieved shareholder/s and the associated costs which seem to climb uncontrollably each year. Quite clearly this is a situation that most of us would want to avoid.
The good news is that with the right advice you can put into place strategies that can deliver appropriate outcomes if a trigger event occurs. Through taking into account your current situation, existing relationships and intended outcomes, you can implement a cost efficient and tax considered customised solution.
So the underlying messages are:
- Financial planning for small business is crucial on several fronts. If you don’t have a formalised plan in place, you need to establish one with some urgency.
- This is a specialist area and needs specialist input. Loose shareholder agreements are almost as problematic as having no shareholder agreements.
- With the right advice and assistance you can establish strategies that deliver optimal outcomes for your small business.
- Don’t delay. Act now!
Lex Goldsmith | Senior Planning Analyst | Principal Edge Financial Services
