What Happens When Your Biggest Asset Is Your Business?

For many business owners, their biggest asset isn't sitting in a bank account. It isn't an investment portfolio. It isn't even their home. It may be the business they've spent years building. The business may provide their income, employ other people, support their family and represent a significant part of their overall wealth.

But that can create an interesting question:

What happens to your wealth if much of it is tied up in your business?

And perhaps an even more important one:

What happens to that wealth when you're no longer able to run the business?

Your business can be more than your income

When you're a business owner, it's easy to think of the business primarily as the source of your income.

But over time, it can become much more than that.
You may have built equity in the business.
You may own shares in a company.
You may have developed a valuable client base and established a strong reputation.
You may have employees, systems and intellectual property that contribute to the value of the business.
Perhaps you've reinvested profits rather than taking everything out of the business.
Perhaps the long-term plan has always been to eventually sell the business and use the proceeds to fund retirement.

In that situation, the business isn't simply where your income comes from.

It may be one of the biggest components of your personal wealth.

What happens if you can't be there?

If you're heavily involved in your business, your ability to work and the value of the business may be closely connected.

What happens if you become seriously ill?
What happens if you're unable to work for an extended period?
What happens if you die?

The answers aren't necessarily straightforward.

The business might continue operating successfully without you.

Or it might depend heavily on your knowledge, relationships and decision-making.

Your family may own an interest in the business through your estate.

Other shareholders may want to maintain control of the business.

Employees and clients may need certainty about what happens next.

And at the same time, your family may need access to the value you've spent years building.

This is where personal, business and estate planning can start to overlap.

Your business may be part of your estate

When people think about estate planning, they often think about the family home, bank accounts, investments and personal possessions.

Business ownership can sometimes be overlooked. But if you own shares in a company or have an interest in a business, that interest may form part of your overall estate.

That raises some important questions.

Who would own those shares if you died?
Would your family want to retain them?
Would your business partners want to buy them?
Would there be an existing agreement that deals with what happens?
How would a purchase be funded?
What would the business be worth?
And would the value of the business provide your family with the financial security you intended?

These aren't necessarily questions that need to be answered by insurance alone.

They can involve your solicitor, accountant, financial adviser and other professional advisers.

The important thing is that they are considered before they're needed.

The value of a business isn't always easy to access

There's another important distinction for business owners. You can own a business that is worth a significant amount of money without having that money readily available.

A business valuation might tell you what the business is worth. But that doesn't mean you can simply withdraw that value when you need it.

The value may be tied up in the business itself.

This can become particularly important when thinking about retirement, succession or what happens following the death of an owner.

If your family needs financial resources but much of your wealth is tied up in your business, there may need to be a plan for how that value can eventually be realised.

Succession isn't just a retirement conversation

Business succession is sometimes treated as something to think about when you're ready to retire.

But succession planning can be relevant much earlier.
You might want to eventually sell the business.
You might want the next generation to take over.
Your business partners might eventually buy your interest.
Perhaps key employees could take on ownership.
Or you may not yet know what you want to happen.

That's okay.

The important thing is recognising that the business may be one of your most significant assets, and therefore what happens to the business can have a significant impact on your family's financial future.

What happens to the business and what happens to the family?

These two questions can sometimes be closely connected.

Imagine a business owner dies unexpectedly.

Their family may need the financial value of their business interest. The remaining shareholders may need certainty about who owns the business. The business may need stability. There may be employees who depend on the business continuing. There may be debts or other financial commitments.

Without a plan, several different interests can collide at once.

A well-considered succession and estate plan can help clarify what is intended to happen.

Insurance arrangements such as Shareholder Cover may also form part of the funding strategy in appropriate circumstances, but they are only one part of the overall picture.

The legal ownership arrangements, valuation methodology and agreements between owners are equally important.

Don't forget your personal financial plan

If your business represents a large proportion of your wealth, it's also worth considering what that means for your personal financial planning.

How much of your wealth is tied up in the business?

How much is outside the business?

What would happen if you couldn't work?

What happens to your income if you step away?

How will you fund retirement?

What happens to your business interest if you die?

Would your family know what the business is worth and how it is intended to be dealt with?

These questions aren't about assuming something will go wrong.

They're about understanding how dependent your overall financial position is on one asset.

You've built more than a business

If you've spent 20 years building a business, you haven't simply created an income stream.

You've built something that may represent years of:

• Hard work

• Knowledge

• Relationships

• Reputation

• Investment

• Risk-taking

• Time

• Financial sacrifice

It may now be one of the most valuable things you own.

That makes the business part of a much bigger conversation.

Not just “How do I protect my business?”

But:

“How does my business fit into the financial future I've built for myself and my family?”

When your business is your biggest asset

Business owners often spend a great deal of time planning how to grow their business.

But protecting the value they've already created can be just as important.

If much of your wealth sits inside your business, succession planning, estate planning and financial protection aren't necessarily separate conversations.

They're connected.

Your Will may need to consider your business interests.

Your shareholders' agreement may need to reflect what you want to happen to ownership.

Your insurance arrangements may provide funding for particular risks.

Your personal financial plan needs to recognise how much of your wealth depends on the business.

And your succession plan needs to consider what happens when you eventually step away.

Because if your business is your biggest asset, what happens to the business is also a question about what happens to your wealth.

You've spent years building it.

Taking the time to understand how that value would be dealt with if your circumstances changed can help provide greater clarity for you, your family and the people who may eventually take the business forward.

If a significant proportion of your wealth is tied up in your business, it may be worth reviewing your succession, estate and protection arrangements together. New Vision Financial Services can help you consider the insurance and financial protection aspects of that conversation, working alongside your solicitor and accountant where appropriate.

Nimalka Perera
Business Development Manager
New Vision Financial Services

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