Are you business critical?
We have dealt with many business owners over the years in all shapes and sizes. Within this short article I am going to focus on some of the planning ideas available to businesses whose owners ‘are the business’. By this I mean a business that without a certain person would effectively possess no sale value.
One of the biggest challenges businesses like this face, is that when this one person retires there is no business or no business to sell. Advanced planning is therefore vital in order to extract or build as much value into a business prior to retirement.
An area of planning we like to explore is what to do with excess cash within a limited company. A profitable business, generating good profit year after year will soon get to a position where they have a large cash buffer. What are the normal options available in this situation?
Withdraw a salary
Withdraw dividends
Make employer pension contributions
It is cash in excess of the above that often provides business owners with a bit of a headache. This has been exemplified in recent years with desperately low interest rates. I’ve lost count of the amount of times I’ve seen limited companies sitting on stacks of cash earning no interest which continues to build up through the years.
What are the options for this surplus cash?
Leave it in the company current account earning no interest
Use a cash management service to at least earn some interest
Look to invest the money into a corporate investment account
We can look at the pros and cons of each of these on an individual basis. What works for one company may not be suitable for another.
Option 3 can often be an interesting route for businesses that are still some way off of winding down but have, and expect to continue to have, large cash surpluses each year. The diagram below illustrates this:
Initial investment amount £1,000,000
Long term cash return: 1.5% per annum
Long term investment return: 5% per annum
As always, there are no guarantees, and this is for illustrative purposes only. I am just trying to show the potential long-term impact of holding cash.
Why is the particularly interesting for businesses with no business sale value?
Companies, and business owners, in this position can plan ahead with a strategy like this. By doing so, they are diversifying away from them being the business and ultimately them being their own pension. Building an investment pot within the business does come with some tax differences that would need to be discussed and understood ahead of any planning.
There is no one size fits all approach and individual advice should always be taken.