Building and protecting your wealth A business owner s guide ISSUE 2 - APRIL 2010
Contents Building and protecting your wealth 1 Greater rewards 2 Think about it 3 Getting on track 4 Starting your business 6 Growing your business 10 Managing your business 14 Exiting your business 16 Investment keys 20 Taking cover 21 Your next steps 22 What you need to know This document has been prepared by AMP Financial Planning Pty Limited (AMPFP), ABN 89 051 208 327, AFSL No. 232706, 133 888. The information in this document is of a general nature only and any advice is not based on your objectives, financial situation or needs. Accordingly you should consider the appropriateness of any advice to your personal circumstances before acting on the advice. The information in this article is current as at April 2010, and may change over time. If you decide to purchase or vary a financial product, your financial planner, AMPFP, and other companies within the AMP Group will receive fees and other benefits, including fees calculated as a percentage of either the premium you pay or the value of your investment. Further details are available from your financial planner or AMPFP. While AMPFP has taken all reasonable steps to ensure that the information in this documents is accurate, neither AMPFP, its related entities or any of its employees, directors or officers, give any warranty of reliability or accuracy, and to the extent permitted by law, are not responsible for any errors or omissions (including those due to negligence) contained in this document. Taxation and other legal considerations are based on the continuance of current laws and our interpretation of those laws. The tax consequences of any investment will depend on the individual circumstances, and you should seek your own tax advice. The stories in this document are for illustrative purposes only and are not based on a particular person s actual experiences.
Building and protecting your wealth As a business owner, you pour time and money into your business. But financial success doesn t just come from having a good business. It s a matter of managing your finances well inside and outside your business. Whether you re just starting out or have been in business for 20 years, whether you re a one-man-band or employ tens of staff, the decisions you make about your money really add up. They could mean the difference between just doing fine or really thriving financially. Knowing how to build and protect your wealth increases the potential for your goals and dreams to become reality. How to use this booklet You ll find tips on how to build and protect wealth as a small business owner in this booklet. While it s structured around the life stages of a business - starting, growing, managing and exiting - all sections are worth a read, regardless of where you re at in the business cycle. For example, issues involved in exiting your business should be worked through many years in advance to make the transition as smooth as possible. Building and protecting your wealth - A business owner s guide 1
Greater rewards Having your own business can deliver rewards in more ways than one. You may enjoy being in control, or want more lifestyle options and flexibility. If you re like many business owners, a key reward that you expect is financial success. Financial security and reserves can free you up to focus on what s important to you. But it often takes more than just owning a business to achieve this. There s nothing like a good plan While being in business may sometimes open seemingly unlimited opportunities to make money, being able to manage and grow money is another matter. When it comes to building wealth, it s not what you have that counts, but what you do with it. If you re like many business owners, you might be so busy running your business that there often isn t as much time to plan as you need. You re most likely a fairly driven person who makes things happen, but what about things beyond your control? What if something unexpected happened to you or your business partner? How would your business keep running and money continue to come in? For many, because business is like their baby it can be hard for them to know whether the choices they make involving money are the best financial decisions or whether they re led by emotion. Should you be putting more money into your business or investing elsewhere? Quicktip Business owners need a holistic view of their business and personal finances and assets. That s why it s important to seek appropriate advice. Good financial planning and taxation advice can contribute to a comprehensive, integrated financial plan designed to meet both your personal and business financial goals. 2 Building and protecting your wealth - Greater rewards
Actual financial gap Think about it Actual market value (less tax) What are you aiming for? Goals compete for your time and money so you need to work out your priorities. How should you rank personal, family and business needs plus the ability of your business to help you achieve these goals? Lifestyle and financial goals Personal Family B U SI G O AL Short term Medium term Business N ES S S Long term Be specific about your goals and write them down. You might have a special dream for your business like seeing it fund significant community or overseas aid initiatives. Or you might want to only work 3 days a week. Some goals may include: The financial planning cycle Personal Business Both Short term personal satisfaction Medium term house children s education holiday 7. Review as circumstances/ legislation changes other investments children s education 6. Implement plan 5. Obtain agreement Long term extended travel Family participation 1. success Gather information/ business assess current position Business growth/ expansion Family participation industry/community recognition continued family participation income car(s) 2. Identify goals income Free time 3. Indentify constraints/ any financial gap Financial independence in leisure activities 4. Written options/strategies/recommendations retirement transfer of Family ownership independence winding down from the business Building and protecting your wealth - think about it 3
Getting on track For most business owners, being able to achieve their goals is dependent on business cashflow and capital value. Maximising the performance of your business and personal finances may involve input from a team of professional advisers. This could include your accountant, solicitor, financial planner and business coach. Advice from a financial planner can help you uncover your financial needs and some areas of risk in your business. Starting your business Plan for success: Where your business is now, where it s going and how it will get there. Pace yourself: Know how to budget and manage your spending. Cash is king: Keep a reserve in a rewarding place. The right funding: Sustainable borrowing from the right sources at a good price. Protect you and your loved ones: Make sure you have the right types and levels of insurance. A super opportunity: Find out if you can get a government bonus of up to $1,000 a year by contributing personally to super. A matter of structure: Seek advice on which business structure is best for you. > From page 6 Growing your business Funding growth: The pros and cons of different funding sources. Managing debt: Consider interest rates and tax implications of various debts. What ifs: Planning for the unexpected. The right balance: Understand and manage your personal and business expenses. Save regularly: Be prepared for a rainy day. Super benefits: Make the most of attractive tax advantages and build for retirement. > From page 10 4 Building and protecting your wealth - Getting on track
Managing your business Invest well: Diversify to spread risk and potentially maximise return. Owning assets: Certain ownership structures may offer tax and asset protection advantages. It s still super: Potential tax advantages and potential benefits around insurance, estate planning and retirement income in super. More than a Will: Plan in case you pass away early or become incapacitated. > From page 14 Exiting your business What s your business really worth? Identifying gaps. Helping close the gap: Ways to boost or supplement your business sale value. Exit options: The real issues involved to help smooth your exit and maximise what you receive. Succession planning: How to pass your business on and to whom? Factoring in tax: Get advice about Capital Gains Tax. > From page 16 Building and protecting your wealth - Getting on track 5
Starting your business Whether you re launching a business from scratch, buying into or taking over a business, getting started is a time of great excitement, even though it might be a little daunting. Armed with fresh perspective and energy levels, many new business owners are inspired by the idea their future is now really in their hands. Don t underestimate the value of putting in place good business foundations in this start-up phase to help ensure your business stability and longer term survival. Plan for success A documented business plan could underpin your business success. It should provide a detailed overview of where your business is now, where it wants to go and how it s going to get there. Other inclusions could be market analysis, product/service research and development and staff development plans. You might work with your accountant, financial planner and business coach to create your business plan. Not only can this document provide focus and clear direction for you and your team, it may also help secure funding from potential lending sources. Quicktip To get started in the right direction, take a look at the business plan outline available at www.amp.com.au under Business. Pace yourself Setting up your business premises, developing marketing tools, buying equipment and possibly hiring staff can all be important, but it s equally important to stick to a realistic budget. The anticipation of new customers and greater sales can make some business owners a little over-confident about their resources. Knowing how to budget and manage spending is an invaluable skill. Think carefully about what business equipment you really need, what s appropriate for you to take as drawings and whether you should lease or buy can help avoid liquidity problems. 6 Building and protecting your wealth - Starting your business
Cash is king Ensure you have adequate cash on hand for at least your immediate and short-term needs. One issue for many businesses is effectively managing cashflow so the GST they collect is still on hand, ready to pay the Tax Office when it s due and hasn t been used to fund regular business costs. Consider where it is most rewarding financially for you to park your cash - in a transaction or cash management account, or perhaps in a loan offset account? Your financial planner and accountant can help you decide. The right funding Setting up and growing a business usually requires injections of funds, but it s important that debt levels are sustainable. Be careful not to borrow too much as this can really sap your business cashflow and put unnecessary pressure on you. Explore different sources of funding and compare interest rates and tax implications. Look at various ways of structuring loans, including interest-only and secured versus unsecured. Consider the overall costs involved in using credit cards or a business overdraft to see if they will help or hinder you. Building and protecting your wealth - Starting your business 7
Protecting you and your loved ones You might feel a little invincible but the reality is things can happen beyond your control. What if you or your business partner(s) were to suddenly get injured, seriously ill or die? Where would the money come from to pay your business bills and personal living expenses? You can secure peace of mind for you and your loved ones - especially your dependants - by having the right types and levels of insurance cover to protect your assets, of all kinds. Your ability to earn shouldn t be overlooked. Various types of insurance could prove invaluable to you, such as life and total and permanent disablement cover, income protection, crisis cover - and key person cover if, for example, your partner was no longer able to continue in the business. Find out more on page 21 Taking cover. Quicktip some types of insurance can be held within superannuation for potential tax advantages and greater options around the way the insurance payment can be paid out in the event of claim. 8 Building and protecting your wealth - Starting your business
Ben and Kara s story After meeting with their financial planner, Ben and Kara - who run an architecture firm and family together - decided to arrange their life insurance through their self-managed super fund. Subsequently, their self-managed super fund can claim a tax deduction on the life insurance premiums that it pays. The insurance through their self-managed super fund was arranged so that any payment could be made as a lump sum and/or pension, giving them some flexibility to draw it tax effectively. They may also be able to tailor pension arrangements, such as paying a death benefit pension to their children, in circumstances, including where the children are under age 18, or under 25 and financially dependent on the deceased member. A super opportunity Although it might be the last thing on your mind, consider the tax advantages of putting money into superannuation - even in the early years of business if you can. Not only does it start the habit of saving, the sooner you invest in super, the more potential your savings have to grow because of the power of compound returns where you can earn returns on your returns. Over the years this can seriously add up - rather than trying to play catch up later. Government changes to super contribution limits mean it is now harder to catch up in later years. Since your income might be lower while you re getting your business established, the government might put up to $1,000 a year into your super if you contribute after-tax personally and meet other criteria. Ask your financial planner or accountant for details. A matter of structure There are many ways to structure a business: Sole trader, partnership, trust or company. Various structures have different requirements and tax implications. The right structure for you will depend on your particular situation. Choosing the right structure can offer real advantages so seek advice from your accountant or solicitor. Building and protecting your wealth - Starting your business 9
Growing your business Having passed the start-up stage of business, you would realise things don t always go as expected, but you re likely to be feeling a lot more on top of things. By now business should be gaining momentum and you ll probably be pursuing growth. You might be wondering how to best manage business expansion and work smarter. It s important to keep revisiting your business plan to get your bearings, change your plan as necessary and get advice to maximise your financial opportunities within and outside your business. Funding growth Whether you re developing new products or services, hiring more staff, ramping up your marketing or expanding your premises, growth takes resources. Before deciding what areas to invest in for growth you should realistically evaluate what sort of return that investment is likely to deliver. Can you fund growth initiatives out of your existing cashflow or do you need to look for other funds? Weigh up the pros and cons of different funding sources - such as drawing on equity you might have in other assets. 10 Building and protecting your wealth - Growing your business
Managing debt Did you know that having a good strategy behind how you structure and pay off your loans could potentially save you thousands of dollars and years off the loan periods? You might be better off consolidating debts into one lower-rate loan. Prioritising repayment of debts that carry the highest interest rates or have less favourable tax implications can put you in a better position. What ifs A good contingency plan addresses control and signatory issues if you or your business partner are temporarily or permanently unable to make business decisions. Would someone else be able to authorise payments and make decisions to keep the business running if you weren t able to? It might be prudent to put in place a formal buy/sell agreement in advance between partners, setting out the terms of a potential business transfer and a pre-determined price if one partner had to sell out their share in case of the unexpected. Quicktip some business partners take out life insurance on each life for the respective value of their business interest so they have certainty that funds will be available to buy out the other partner should they pass away early. Do you have a Will and is it up-to-date? Does someone have Power of Attorney on your behalf? See More than a Will on page 15. Take a look at the Protecting you and your loved ones on page 8. Building and protecting your wealth - Growing your business 11
The right balance Sometimes it can be hard to know how much to draw from the business and how much to leave in. It can be a challenge trying to balance your personal and family needs with your business needs. That s where a good understanding of your personal and business expenses and wants versus needs can really help. A realistic budget and good boundaries can give you confidence in your decisions. Quicktip rather than tying up all your money in the business, consider keeping some cash on hand as a safety net just in case you or your business need funds in a hurry - perhaps in a cash management account. Save regularly For some, financial and time demands mean they don t even consider a regular savings plan - at a personal or business level. The idea of putting away for a certain goal or need or saving for a rainy day can pay off in more ways than one. The power of compound returns, where you earn returns on your returns, means regular savings add up even more. And because you have cash on hand you re less likely to need to borrow money later on so you avoid those fees and interest charges. Quicktip Too many people rely on their business as their retirement nest egg. Some businesses may not be worth as much as owners expect. See What s your business really worth? on page 16. 12 Building and protecting your wealth - Growing your business
Super benefits For you Consider saving personally into superannuation, for attractive tax advantages. Pre-tax super contributions within government caps are taxed at just 15% and investment earnings at a maximum of 15%. That s a lot lower than most marginal tax rates, meaning more money potentially growing for you and less going in tax. Depending on your personal circumstances, contributions may also be tax deductible. And contributing now rather than putting in lump sums years down the track means you can make the most of annual contribution caps. For your employees A financial planner can help you evaluate which super fund is attractive for your employees now and in the future. You may be required to contribute to a default fund specified under an award for some employees unless they actively choose your preferred fund or some other fund. It s important you meet government regulations regarding super for any employees you have. Toby s story Toby operates his electrical business as a sole trader. He s happy enough with his current income but realises that because his business relies on his skills and reputation, he might not be able to sell it for a handsome lump sum to provide a retirement nest egg down the track. So, even though by law he doesn t have to contribute to super for himself, he does so because he wants the security of knowing he s building up an asset for his retirement. He gets tax advantages now and once he is 60 or more he can draw on his super tax-free. Building and protecting your wealth - Growing your business 13
Managing your business Some define this as the prime time of their business. Although there are still challenges, now that the business is well-established there tends to be more potential to reap the fruits of your labour. Now can be an ideal time to build assets outside business. Investing well You ve probably heard the age-old wisdom about not putting all your eggs in one basket. The same goes for business owners. After probably making investments into your business for years, it may now be wise to build up assets outside your business. Even if you have other assets, depending on your circumstances it could be in your interests to expand and diversify. Different assets and industries tend to perform differently and move in different cycles. So by diversifying you can effectively help spread your investment risk. A financial planner can help you structure an investment portfolio that suits your goals and attitude to risk, in order to maximise returns. You might invest using an existing lump sum and/or through regular ongoing instalments. Perhaps borrowing to invest using a line of credit or margin loan may be appropriate. There may be potential to unlock equity in your business or home to build greater wealth. See Some investment keys on page 20. Quicktip stay protected - do you have the right types of insurance at appropriate levels of cover, given your current business and personal circumstances? Check your arrangements and remember, being underinsured can be risky and being overinsured a waste of money. See Taking cover on page 21. 14 Building and protecting your wealth - Managing your business
It s still super As touched on in Super benefits on page 13, saving through superannuation can offer attractive tax advantages. There can also be potential benefits from an insurance, estate planning and retirement income point of view. A variety of contribution strategies are available, including potential tax offsets for contributing on behalf of a low-income spouse. Getting advice on how and where to invest your super - and how to best cater for your employees super - can really pay off. There are so many superannuation funds with diverse investment options to choose from. You might prefer to have a self-managed super fund for yourself and a separate managed super fund for any employees you might have. A financial planner can help you weigh up the options. Quicktip While some business owners purchase their business premises with their self-managed super fund and then lease it back to their business, financial advice should be sought to find out if this will give you the best results financially over the long term. You should also seek legal advice as to whether these types of transactions are allowed under superannuation law. Do you see your business as your retirement plan? Turn to page 16 to read What s your business really worth? More than a Will Have you got an up-to-date written plan for how you want your assets handled when you pass away? Without a valid Will, managing your estate could be costly, time consuming and it must be distributed according to State-based legislation. Do the terms of your Will enable the executor to keep your business operating until it is sold? And provide the funds to do so? You may also want to consider setting up an enduring Power of Attorney for someone to manage your affairs if you become incapable. Otherwise, the control of your assets could pass to a person appointed by a Court. An estate plan helps ensure your assets pass to who you want, when you want and in the most tax effective manner. It can address how your business will be treated, how debts will be paid out, and how your dependants will be provided for. A solicitor, with assistance from your accountant and a financial planner, can help you prepare a suitable estate plan. Building and protecting your wealth - Managing your business 15
Exiting your business Retirement is not the only way to exit your business. Some owners leave because they receive a good buy-out offer, some because they ve had enough, and others may be forced to exit for financial, management or health reasons. You ve worked hard for your business so why not realise as much value as you can and make the transition as smooth as possible? This requires some good financial planning well before you decide to exit. What s your business really worth? Having invested so much of their time, energy and money, most owners see their business as being worth a substantial amount. But many are disappointed to discover that their business value is less than they think. There is often a gap between the amount of money a person needs to meet their goals and the actual value of their business or its assets. This gap can be accentuated by a crisis such as illness or sudden death. Financial needs/goals Actual financial gap Perceived financial gap Perceived business value Value ($) Actual market value (less tax, selling costs and other adjustments) Time 16 Building and protecting your wealth - Exiting your business
Helping close the gap A financial planner can advise on financial strategies to help you narrow the gap between your financial needs and your business actual market value. Often the earlier these strategies are put in place, the better the results. They may involve investing money outside your business for a better return and building up other assets to meet the shortfall. Did you know? While an accountant or business broker can help calculate a value for your business, this could vary depending on market and industry conditions - and how quickly you need to sell your business. Building and protecting your wealth - Exiting your business 17
Exit options Whatever your reason for exiting the business, advance planning can make the process as smooth as possible and help maximise what you receive as a result. Consider whether you re likely to keep the business within your family, sell it outside the family or liquidate it. While anyone knows that exiting a business is not just a matter of handing over the keys, many get a surprise when they find out some of the real issues involved: Keep business within family Retirement transfer to whom? when? how funded? extra salary/dividends to original business owner? can these be supported? Illness (long term) how? who manages or replaces owner? how will overheads be paid? Death executor to run business? probate delays? who keeps - family (active/passive) or nonfamily? provision for other beneficiaries? Money to continue running business until issues settled? payment of director loans and cover for personal guarantees? Sell business outside family when? who will buy? how much for? is it guaranteed? is there a market? when? who will buy? how much for? is it guaranteed? is there a market? probate delay? executor to run business? when? Who will buy? How much for? what is business value? Money to continue running business until sold? payment of director loans? Liquidate business possible stress? impact on business value? change of lifestyle? change of lifestyle? impact on business value? possible stress? change of lifestyle for loved ones? executor to liquidate business? impact on business value? when? to whom? Funding of debts and ongoing payments, eg leases? Note: In addition to the issues in this table there may also be tax (including capital gains tax) and stamp duty considerations. 18 Building and protecting your wealth - Exiting your business
Succession planning A succession plan lays out details of who you will pass the business on to and how. It may specify if you are going to stay on in a consultancy role and on what terms. Succession planning may include a formal buy/sell agreement and deal with estate planning issues. If the business is a partnership, has dissolution of the partnership in the event of death been addressed? A financial planner, accountant and solicitor can help you work through the issues. Factoring in tax Consider the impact of any Capital Gains Tax liability on your business exit plans, and get advice on whether you can access CGT concessions for small business. Bob and Penny s story Partners in a family retail business, Bob and Penny are both in their early sixties. Several years ago they sought advice from their accountant and financial planner about how to maximise wealth on retirement. On the sale of the business to a third party, they apply the Small Business Capital Gains Tax (CGT) concessions to reduce their tax liability and put the proceeds from the sale of the business into superannuation. They convert their superannuation into a pension and receive tax free payments, as they are over 60. As an additional benefit, investment earnings within the superannuation pension are also tax free. Building and protecting your wealth - Exiting your business 19
Some investment keys When deciding which investments may be best for you, a variety of issues should be considered including: 1. Direct or managed? you could invest into an asset directly - such as owning a property or shares yourself - or through a managed fund, where individuals money is pooled and invested by a professional investment manager. A managed fund can provide access to investments that you might not be able to access alone and possibly help spread risk through greater diversity. 2. How much liquidity? some investments are more liquid - which means you can sell them relatively quickly and access their value as cash. For example, it ll generally take considerably longer to access the cash value of a directly-owned property than of shares. Some assets have other limitations on accessibility - such as superannuation which is generally preserved until you re at least 55. 3. Risk versus return. while all investing carries risk to some extent, some investments have the potential for greater volatility and risk. Usually, the potential reward for these greater ups and downs is the possibility for higher returns. Getting the right risk/return balance will depend on your personal circumstances and your tolerance for risk. 20 Building and protecting your wealth - some investment keys
Taking cover Weigh up the potential risks and consider which types of insurance will give you the most peace of mind. Item Events which can occur Possible solutions Business Key person insurance. continuation illness or death of the business owner or key person, negatively impacting business income and viability. client and public claims which may be expensive to defend and costly to pay. Business disrupted or ceased for a period due to damage to property or people. People injury and accidents at work. Buy/sell arrangements to assist with speedy handover. public liability, product liability and professional indemnity cover. Business expense insurance. loss of business income insurance. workers compensation. illness or injury to a person outside work. laying off staff if business is unable to operate. Assets Fire, storm damage. Burglary. personal insurances. loss of business income insurance. property damage insurance. Burglary cover. Personal arrangements employee theft. damage to or theft of business owner s personal property. sickness or injury causing inability to work. death. dishonesty cover. Motor vehicle, building and contents insurance. income protection and/or trauma insurance. death and total and permanent disablement insurance. Building and protecting your wealth - taking cover 21
Next steps Your next steps Some of the ideas in this booklet may be simple enough for you to act on immediately. Some are more complex and you should consider seeking expert advice, specific to your circumstances. Remember, because business is complex, it may require a team approach with your accountant, financial planner, solicitor - and possibly your business coach and business broker - all contributing their expertise. Value of financial planning advice A financial planner can help you work out what plans and protection you and your business really need, tailored to your unique situation and goals. While your business is a vital part of the picture, your plans should be just as much about you personally. Personal Situation + = Business Situation Current Situation You might seek advice in regard to a particular area or you might want a comprehensive financial plan. Quicktip a good financial plan provides a personalised blueprint for building and protecting wealth, considering business and personal assets. if you don t already have a financial planner, find a financial planner at www.amp.com.au 22 Building and protecting your wealth - next steps
Why AMP? AMP has been helping Australians build wealth since 1849. Today, it helps more than 3 million people and manages $110 billion in assets. AMP offers a range of good value, quality products and services to help business owners build and protect their wealth - including advice, investments, banking, retirement income, superannuation and insurance. Phone 133 888 or visit www.amp.com.au to find out more. Building and protecting your wealth - next steps 23
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Own tomorrow by calling today. Phone 133 888 or visit our website at www.amp.com.au NS4797 04/10