Case Studies

Case Study 1: Family Owned South Coast Based Convenience store
Background

This business was formed in the 1990’s initially by a husband and wife running a single shop. Subsequently, they were joined by their son who took over running the business and expanded it significantly with several stores within the group. The father is now deceased and the remaining shareholding is 75% son and 25% mother. The son is married with his own family. There is also a daughter who is not involved in the business. The business has a current value of £6M increasing its capital reserves year on year from profits.

Issues Identified

1. Business Value and Succession Planning – Currently in the event of anything happening to the mother then her shares would pass to the son and qualifies for BPR. The remainder of her estate including real estate, investments, cash and other assets would pass to the daughter. The respective value of the company shares v’s the remainder of her estate are likely to be significantly different and the inherent risk in the company share value is much higher than that of the risk attached to the remaining estate. This could cause resentment and dispute of the will between the brother and sister (and their respective families) in the event that the value of the respective assets are widely apart.

2. Currently in the event of anything happening to the son then his shares would pass to his wife and family. This would likely cause a fire sale valuation as he is the main driver of the business. Neither his wife or his mother are likely to want to run the business. Almost all of the net worth of the son (and his wife and family) are represented in his 75% shareholding of the business. This could be significantly eroded in the event of anything happening to him.

3. Key People – It was identified that within the senior management there are key people in each of the respective stores and if anything were to happen to any of them it would result in a loss to the cash flow through a combination of cost of replacement, business disruption and potential loss of other members of staff.

4. Employee Recognition - Having identified the importance of the Key people to the business it is important to incentivise them to feel valued by the business.

Solutions

The company will revisit their shareholder agreement and change to each of the shareholders buying the shares from the other party as opposed to gifting them within the family.

1. Shareholder Protection - A Life Insurance policy on each shareholder is taken out and written under trust with an option agreement to sell to the other. The mother's estate will benefit from the true value of the company shares and now be available to distribute according to her wishes without variation on valuation causing any disputes. There is also the opportunity to address IHT through the use of a by-pass trust passing the proceeds of the share sale to the grandchildren. The son would now own 100% of the business and avoid any legal dispute in turn protecting the value of the business.

2. As above a Life Insurance policy on each shareholder is taken out and written under trust with an option agreement to sell to the other. This would essentially protect the value of the business and prevent the requirement for sale of shares to any 3rd party or disposal of the business at a distressed valuation. The son's wife and family would now receive the true value of their main asset.

3. Key Person Insurance – The company takes an Insurance policy on each of the key people covering against Critical Illness and death. In the event of a claim, proceeds would be paid directly to the company protecting against cashflow detriment. This would fund replacement personnel including agencies fee’s, golden handshake, customer retention incentive etc.

4. Employee Benefit – The key people above are now recognised by the company and themselves as important to the business. Whilst the Key person Insurance protects financial loss to the company there is nothing in it for the employees themselves. A benefit of 5 times salary is put in place for each Key person for their families in the event of anything happening to them. This is effected through the use of Relevant Life legislation. The premium is paid by the company saving personal tax and employers and employee’s National Insurance. It is also offset against Corporation Tax. There is no P11D benefit. The policy is under a trust and paid outside of the estate immediately to the employees family. Essentially there is a 50% saving on the cost of implementing this protection.

Case Study 2: Midlands Based Builders Merchants Supplies Business
Background

This business has been developed over 25 years into a leading company of its type in the Midlands. lt employs 140 people with a senior management team of 5 and has a turnover in excess of £20M making a profit of £2M per year. lt was built and owned by a married couple but as a result of a recent divorce, the shares are now fully owned by the husband only. There is an appetite to sell the company in the future. The shareholder has very little to do with the day to day running of the company having placed a senior management team to run the business.

Background

1. Key People - There is a senior team of 5 that should anything happen to any of them it would result in a loss to the cash flow through a combination of, cost of replacement, business disruption, potential loss of a customer. The owner also has no desire to step back into the role of management.

2. Succession Planning - Senior management have concerns over their future as there is now only a single individual shareholder and should anything happen to him then they have uncertainty over dealing with his estate. It is also important to retain the confidence and energy of the senior management team as the business builds towards eventual disposal.

Solutions

1. A protection plan covering against Critical illness and death is effected on each of the 5 senior management individuals with payment directly to the company in the event of a claim. This would resolve any detriment to the cash flow and give the required amount of money to deal with replacement personnel including agency fee's, golden handshake, customer retention incentive etc. There will be no need for the shareholder to re-engage in day to day running of the business.

2. a) Shareholder Protection - A Life Assurance is taken out on the life of the shareholder to allow the management team to purchase the shares of the company from his estate. This protects the value of the company for the shareholder's estate as it avoids a fire sale. It also gives the management comfort for their future. Legal documentation is drawn up and the shareholder agreement and articles of the company are revised to reflect this.

3. b) Employee Benefit - ln recognition of the importance of the senior management team the company buys protection against Critical illness in addition to the existing Death in Service scheme. Each individual will benefit from a cover of 4 times their salary, The owner of the business is included as he also would like protection for himself. This is arranged on a 'Relevant Life' basis which essentially means that there is no P11d implication and the company can offset against Corporation Tax. There is the addition of saving on Income tax and N. insurance contributions essentially making a 50% saving on the cost.

Case Study 3: Oxfordshire based Based Engineering Group
Background

This business was formed in 1998 and has grown organically to be one of the leading regional firms of its type. The business continues to expand and is looking to grow further through acquisition and continued organic growth. It has a turnover in excess of £10M with improving year on year profits and has significant shareholder funds on deposit. The company is owned by a married couple holding equal shares in the business.

Issues Identified

1. Business Value and Succession Planning – Whilst shares would pass to the other shareholder in the event of anything happening to either of them it was felt that it would create a fire-sale valuation on the business and possibly lead to a significant loss.

2. Key People - It was identified that there are 4 key people in the senior management team that if anything were to happen to any of them it would result in a loss to the cash flow through a combination of cost of replacement, business disruption and potential loss of a customer.

3. Personal Requirements -Existing Life Insurance was being purchased by the owners direct. They were not aware of Relevant Life and that buying Life Insurance through the company as an employee benefit would essentially save them half the cost through tax savings.

Solutions

1. Shareholder Protection - A Life Insurance policy on each shareholder is taken out and written under trust with an option agreement to sell to the other. This would essentially protect the value of the business and prevent the requirement for sale of shares to any 3rd party or disposal of the business at a distressed valuation.

2. Key Person Insurance – The company takes an Insurance policy on each of the key people covering against Critical Illness and death. In the event of a claim, proceeds would be paid directly to the company protecting against cash flow detriment. This would fund replacement personnel including agencies fee’s, golden handshake, customer retention incentive etc.

3. Employee Benefit – A review of the required Life Insurance on the owner's personal circumstance and putting this in place on a Relevant life basis. The premium is paid by the company saving personal tax and employers and employee’s National Insurance. It is also offset against Corporation Tax. There is no P11D benefit. The policy is under a trust and paid outside of the estate immediately to the employees family. Essentially there is a 50% saving on the cost of implementing this protection.

Case Study 4: International Marketing Business
Background

The business is a UK based business with its main activities in New York. There are 2 shareholders both living in the USA and one of the shareholders has agreed to buy 100% of the business and the other to sell and retire. The purchase is by cash up front and a deferred consideration paid over the next 5 years.

Issues Identified

The vendor is concerned regarding the deferred consideration as it is wholly dependent on the purchaser driving the business forward.

Solution

New Co was set up with the purchaser owning 100%. The old company became a wholly owned subsidiary. The transaction recognised the deferred element due to the vendor as a loan repayable over the 5 year period. A Life Insurance and Critical Illness plan were affected by the New Co on the purchaser to match the repayment of the loan over the 5 years. In the event of a claim on the policy, the vendor would be paid immediately. This was reflected in the buy and sell agreement.