Business advisor insights structuring
The reality is most business owners understand their business very well, but very few understand the impacts their group structures will have on their lives in the long term! But don’t feel guilty, there are businesses turning over $400M plus that still have the same structures, as when they started!
Group and personal structuring is important for several factors. These factors go beyond what most business advisors such as lawyers or accountants will tell you!
When it comes to business advisors, most accountants understand tax, some asset protection, but not lending or corporate finance. Most generalist lawyers understand asset protection and some lending aspects, but not tax or corporate finance.
Not all business advisors get their own advice right either! One of our new clients recently came to us with a structure their accountant had set up for them. Their trust owned the equity in their trading company (which is fine) but that very same trust owned all their properties as well (big mistake)!
The issue with most business advisors these days, is they only make money on the structures they are setting up for you today! Most are not financially incentivised to think about your long-term needs! This is in part because dynamic thinking about multiple scenarios in the future takes time (weeks if not months) and is a hard skill to come by.
Our corporate advisory and business advisory services cover the deficiency between these two professions. More importantly we understand lending, security positions, how to use financial instruments as part of group structures and corporate finance. Additionally, we take a long term view on your future needs, that you may not even be aware of yet! Furthermore, we work with your existing business advisors to ensure you have bullet proof, group and personal structures, that will grow with you.
Why group structuring is so important?
As part of our business advisory services, we look at the following things for our clients when creating a tailor made structure for them!
Asset protection
Using the right SPV’s and financial instruments for assets is integral to protecting them. A lot of business advisors will structure clients equity ownership of various assets in a trust. However, trusts are no longer enough on their own, as lenders will take guarantees from a trust level as well when taking a business loan.
Asset protection doesn’t just mean the protection of assets such as property or businesses, but also includes the protection of key business infrastructure.
Borrowing capacity
Having the right structures, will allow you to maximise how much you can borrow. If all your assets are land locked into one or two structures, this means you will not be able to realise your full borrowing potential if the bank has taken a senior GSA (general security agreement) across your entire asset pool.
A typical example is when you take a bank facility, and they put the GSA on the business. In most cases if you wanted to get an external invoice financing facility, the bank’s GSA will block you from doing so.
Another example is in the situation where the bank has provided you with loans that are cross collateralised (cross security is taken, 1st and 2nd mortgages against a mixed asset pool). In an emergency where your revenues have declined, and you can’t demonstrate serviceability. The bank will not lend you more money, and will most likely deny a second mortgage lender coming in from providing you further funds.
Your structures will also affect your ability to layer debt in the right way. Being able to layer debt in the right way is an art form, which will enable you to maximise your borrowing capacity.
Business continuity / ring fencing of liabilities
In an event where a lender/ supplier/ court matter legally takes possession of individual asset or business, your group structures should allow your other businesses to continue to operate. Your structures should also protect other assets in the group, from any other liability spill over from other businesses you operate.
New director appointments
As private organisations grow one of the largest challenges they face is the reluctance for existing staff to take on director roles due to them feeling unsure of business liabilities they maybe be liable for as directors.
By creating the right structures that are merged within the existing group structure, new employee directors can be appointed of new companies, whilst also giving them comfort.
Capital raising
As business grow and wish to take on new ventures, it may not make sense to raise capital from the original parent or holding company.
Having the right structures, means organisations can raise capital at a new SPV level for the new entity, whilst also ring fencing the liabilities of the new entity from the existing core business.
Companies’ vs trusts
A number of businesses are operating out of trusts, because of advice given by accountants to save on taxes on sale of the business asset. However, this isn’t the right structure if you wish to raise capital, bring in partners or have various shares classes in future. Operating out of a trust only makes sense in a very narrow set of circumstances.
Additionally a number of government grants will only be provided to companies and not to a business operating out of a trust structure.
Retaining employees
Owners of businesses may wish to retain staff by providing shares to staff, but without giving them shareholder or board control. Having the right structures and shareholder agreements can enable business owners to retain quality staff without losing control.
Divestment of business arms
If businesses have been structured the right way, business owners have the ability to divest business arms easily. Having the ability to divest business arms allows business owners to crystalise sales and make capital gains on profitable parts of a business, without the hindrance of loss making arms that could bring down sale value. Or it allows them to easily divest loss making business arms, to increase the profitability of the core business.
Government grants
By being structured in the right way, businesses can take advantage of various government grants, that they typically may not be eligible for if they operated out of their existing businesses.
Shareholder control
Group structuring allows business owners to raise capital at the right company or SPV level. By raising capital within the right group entities, management can retain control of the overall group without the dilution that typically takes place with poorly planned capital raising events.
These are just a few aspects we examine as part of our structuring advice. To read more about our business advisory services click here.
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