Financial Advice for the established SME
An established SME will have larger staff numbers which leads to a more developed corporate structure with levels of management beneath the board. How do the owners keep those staff incentivised, all pulling in the same direction?
In the last blog I talked about some staff benefit package options (pension, death in service, private medical etc) which are all valuable benefits alongside an attractive level of pay. For the senior team and non-shareholding board members more incentive may be required. These are the people that have a great deal of responsibility in your business and people who you would expect to drive it forward.
A great way of galvanising a senior team and creating a culture of shared responsibility is with share ownership – often via an Enterprise Management Incentive (EMI) Scheme. With an EMI scheme selected employees are offered an option to buy shares in your company at a specified point in the future (which could be at point of sale) but at the value (or discounted value) at the time the option was granted. This gives the senior staff a financial reward that is directly determined by the success of the business. The tax position can also be advantageous in that there is no income tax or NI on the benefit received and on sale of the shares capital gains tax (CGT) can be at the entrepreneurs rate of 10%. A good accountant will be needed to advise on and set up such a scheme – again highlighting the real importance of having a strong team of advisers.
After making sure your key staff are bought into your business – this lead us to another what if? These are very important people to your business and if something happened to them there could be big negative consequences for the company. Key person protection is designed to pay out a lump sum on the death, terminal or critical illness of the insured key staff member – the idea being that the proceeds can be used to replace lost profit or for finding and hiring/training a replacement. Another area to consider for the shareholders would be director share protection. This would provide money so that if one of the shareholders dies the remaining shareholders in the business would have the funds to purchase the deceased’s interest from their estate. This is typically put in place alongside a cross option agreement to make sure the estate sells. This is hugely important – without one if a shareholder died you could find yourself working with an unwelcome new director or the estate may want to sell the share which could be difficult – leading to financial problems for the company and the family.
A conversation I often have with owners of SME’s is about property – not so much as an asset class but in relation to their specific property, the business premises. Many business owners would view rent as “dead money” and prefer to own their premises. They could buy their premises personally however any rental income paid by the business would be taxed on the individual at their marginal rate. Instead the premises could be owned by the business and held on balance sheet meaning the company saves the rent, but potentially this could put off a buyer in the future as they may not want or need a large property asset. An alternative could be to buy the property via pension – this could be via a SIPP (self-invested personal pension), a collection of SIPP’s (maybe all the SIPPs of the senior team) or perhaps even a SSAS (small self-administered scheme) which is a pooled pension fund only available with a sponsoring employer. The advantage of this would be that the company could fund pension contributions for the business owner(s), their pension scheme(s) could then borrow up to 50% of its net assets (on commercial terms) to provide additional funding to purchase the premises. With the pension fund(s) owning the property the business could then continue to pay a commercial rent to the pension fund, but this would not suffer any tax as it is within pension. The rents could be used to pay down the borrowing and then be an attractive income producing asset for the owners pension fund – all separate from the business.
It should be remembered however that property is not a liquid asset and can be difficult to sell, this could lead to problems when the time comes to take benefits from the pension. This could be further complicated when the property ownership is shared between pension funds and also when the members are no longer part of the business (post sale or retirement). There could also be conflicts of interest if the business decides to relocate/expand.
These points would need exploring further and good quality advisers would be required for legal, tax and financial planning – but all are real considerations and options for the established SME owner.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Any reference to taxation will be based on your individual circumstances and subject to change.
Steve Jordan is a director at Five Wealth with particular skills in advising business owners, entrepreneurs and high-income professionals. Use the links below to read his other blog posts, or to find out more.