Educational guide
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Contents
RBC Wealth Management is committed to helping you build a goal-based financial plan that reflects what’s most important to you. Discover how we can help you grow more than wealth.
Incentivising your employees for future successEmployee share plans – why they can be good for your business.
A clear vision of how different generations can work together can help avoid future challenges.
The right plans can ensure your business lasts longer than your lifetime.
Governance for family businesses
Succession planning for business owners
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pg 4
pg 6
pg 10
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Incentivising your employees for the future
For businesses both new and established,
attracting and retaining the most talented
employees is important for ongoing success.
While competitive salaries might have
secured that talent in the past, these days
cash is not necessarily king.
Made popular in the U.S. during the 1970s
and 1980s, employee share plans have
established themselves as an essential tool
for most businesses when it comes to
recruitment and retention.
“Good news stories in America tend to
eventually come over here and in the late
1980s Britain’s companies started to put
share plans in place at the demand of their
employees,” says Mark Le Saint, director,
RBC corporate employee & executive
services (RBC cees), part of RBC Wealth
Management.
“In the past, employees were paid a salary
and perhaps beyond that didn’t really care
about anything else, as long as things didn’t
get so bad that they lost their job,” he says.
“However, by linking a proportion of an
employee’s remuneration to how the
business performs, a company is aligning
the interests of the employees with directors
and shareholders.”
Aligning your interests with your employeesDeciding to offer a share plan is the first
step, the next is finding the most suitable
type of plan for your business and for what
you are trying to achieve.
There are several types of share plan
available to business owners in the UK, such
as Company Share Option Plans (CSOP),
Enterprise Management Incentives (EMI),
Save As You Earn (SAYE) and Share Incentive
Plans (SIP), all of which are HMRC approved
and carry tax benefits. The right plan for your
business will depend on a range of factors,
such as the size and age of the company, the
type of business, the number of employees
and what it is you’re trying to achieve by
offering the share plan.
“Following discussions with advisers, a plan
can be designed specifically for your
business, depending on where you are in
your growth cycle and what the forecast for
Employee share plans – why they can be good for your business.
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the business looks like, among other
things,” Le Saint says. “Share plans can
really align the interests of employees with
the other stakeholders in the business. They
are sometimes referred to as the ‘corporate
glue’ that binds a company together.”
For private companies, an HMRC tax-
approved plan such as the EMI Share
Option Plan may be an attractive choice.
Awards granted under such a plan
typically vest on an exit, such as a listing or
sale of the business. At this point the value
of the company and its shares may have
risen in value considerably, which could
provide a significant financial gain for the
plan members. The use of such plans are a
particularly popular choice for start-ups or
businesses that cannot perhaps offer large
salaries or cash bonuses. However, through
the use of equity and a share plan, these
companies can still attract the talent they
require by offering the potential for
significant future wealth from the growth in
value of company shares.
“Even if it isn’t the type of plan where the
awards only vest on a key event, such as a
listing, awards may be based on individual
performance or simply staying employed
for a period of time, so employees can
build up a shareholding in the business,”
Le Saint says.
Consider all the outcomesOf course, there can also be perceived
downsides to the decision to implement
a share plan within a business, depending
on the existing ownership culture and how
strong the desire to change that
culture is.
Elanco Kanagasabapathy, an associate
director for RBC cees in Jersey, says some
employees will prefer the certainty of having
money to spend today, so offering shares
partly in lieu of cash could potentially
hinder employee recruitment in some cases.
Also, by transferring shares to employees
through a share plan, the owners of the
business will need to accept a level of
dilution and that the shareholder base of the
company will grow.
Where a business owner prefers that the
equity in the company remains closely held,
perhaps within the family unit, providing
shares to employees can present a dilemma.
However, one potential solution is to create
a new class of non-voting shares that are
issued to employees through the share plan.
While such shares may fully participate in
any growth of the company’s value, the
control of the company remains with the
holders of the original class of shares with
voting rights.
“Often, owners of a business have the vast
majority of their wealth tied-up in the shares
of the company,” Kanagasabapathy says. “In
such situations, an employee share trust can
be created to purchase shares from existing
shareholders, thereby creating a market and
allowing owners to realise cash from their
investment.” Such shares can then be held
in the trust to be used to satisfy awards
granted to employees under the rules of a
share plan.
“What has become clear is that if you can’t
offer some form of equity participation to
your key employees, then you are potentially
not as an attractive proposition as those
competitors that do,” Le Saint says. “Often
when talented people are looking to move or
stay, an important consideration is whether
there is a share plan in place that allows
them to benefit financially, from any future
growth in value of the company.”
Often, owners of a business have the vast majority of their wealth tied-up in the shares of the company.
Elanco Kanagasabapathy
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Governance for family businesses
Mixing family and business can make for a
potentially fractious working relationship.
While on the face of it running a business
with family means you can benefit from high
levels of trust and mutual commitment, this
doesn't guarantee there won't be disputes
over ownership or profit-sharing. This is why
the implementation of clear governance
structures is so important.
Setting a clear plan for the business and
establishing distinct communication lines
to deal with issues such as inheritance,
share options and changing family
dynamics can go some way to avoiding
disruptions.
Oliver Saiman, a relationship manager for
RBC Wealth Management in London, says
history has shown the majority of family
businesses don’t survive beyond the third
generation.
The foundation that a family business is
built on provides the answers to
fundamental questions such as the future
direction of the business, the strategies that
should be followed in order to ensure
continued success and how inheritance and
shares are handled as and when issues arise.
“Wealth is a highly emotive issue, which can
sometimes lead to decisions that cause
friction between family members. By
introducing a governance framework the
principal of a family can help ensure that the
family wealth remains protected” he says.
Safeguarding family wealthThere are a number of structures a
governance plan can include and it's
important that all generations understand
the intended direction of the family’s
wealth.
Some of the most common governance
options available to families include the
establishment of family offices, family
investment companies, family partnerships
or trust structures. The right structure
largely depends on the individuals and
their needs.
“Having governance in place is about
safeguarding objectivity and ensuring
fairness,” Saiman adds.
A clear vision of how different generations can work together can help avoid future challenges.
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A Family Investment Company, for
example, is simply a UK company set up
to hold investment assets where all the
shareholders are family members. The
benefit for business owners is that they
can define who are the shareholders and
distribute both voting and non-voting
shares to denote control.
However, the most effective family
governance should be designed in
reference to the specific family and
business situation rather than relying
on an “off the shelf” solution, says Gerard
Chinniah, a relationship manager at RBC
Wealth Management in Jersey
“Governance should not be created for its
own sake, it should be used more as a
stepping stone to achieving the family’s
goals, such as keeping the business in the
family or meeting certain philanthropic
commitments,” he says.
Similarly, Ben Taylor, a relationship
manager at RBC Wealth Management in
London, says that families should aim to
keep their governance structures as
straightforward as possible. “Keeping it
simple is a good first step, making it too
complicated with too many boards or
committees could end up with the
planned changes not actually taking
place,” he says. “It is important to think
about who is on that board, what happens
if someone was to die or how the family
company or wealth is protected in the case
of a family split. Without a governance
structure in place, emotions can take over
and have a considerable impact on the
future wealth of the family.”
It’s all in the designA well-designed governance structure will
provide a wide range of protections to a
family, from setting expectations and
succession planning, to preparing the next
generation to take over the management of
the estate.
It will also ensure the correct level of
decision-making within the family business
or those managing the family wealth. For
example, identifying those who can make
decisions on the running of the business on
a day-to-day basis and those that are in a
position to make more strategic decisions
on the future or how the family’s wealth
should be invested.
Other areas where a governance structure
can play an important role include the
long-term growth and sustainability of the
business or wealth. It can also set out the
procedures for family members who don’t
want to be a part of the business, or who
want to remove their portion of assets
from the pot, to exit in a fair and
harmonious manner.
“One option for families is to explore the
idea of setting up a family constitution,
which is a written document aiming to
codify the broad principles for which the
family stands, in addition to the wider
aims for the family wealth” Saiman says.
Dealing with disputesDisputes within a family business, or
concerning its wealth, can be costly and
run the risk of damaging the future of the
business and eroding the family’s capital.
A governance structure can include a
‘dispute resolution process’ that has
predefined rules to be applied when
dealing with certain matters.
This type of provision can be as simple as
specifying the procedure for dealing with a
dispute, or as detailed as naming the venue
or a person – an adviser, non-executive
director or family member – that will
preside over the process.
It can also be beneficial when dealing with
factors outside of the family, such as
regulatory changes. By detailing the family’s
strategic vision and focus through a clear
Governance should not be created for its own sake, it should be used more as a stepping stone to achieving the family’s goals.
Oliver Saiman
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governance structure, the risk of
investment decisions being made on an
ad-hoc, unfocused and non-cohesive basis
is vastly reduced therefore going some way
to further protect the family’s assets.
Chinniah adds, “It is important that family
governance is seen more as an evolution
rather than a revolution. There is a limit to
the speed of change that families can
absorb, so allowing members to adopt the
changes and perhaps introduce a regular
review of the governance processes in place
can help make the implementation easier.”
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Succession planning for business owners
Building a successful and thriving
business takes a lot of time and a great
deal of effort, particularly in the early
years. But among all the growth strategies,
marketing plans and brand awareness,
there is one important piece of the
business jigsaw that is often overlooked
– a succession plan.
While a business owner may have been the
driving force behind their company’s
achievements, nothing lasts forever. The
secret to ensuring your business will
continue to be a success after your
retirement or death, lies with a well
thought out succession plan.
There is no ‘one size fits all’ solution when it
comes to succession planning, as every
business’s circumstances are different to
another. Unfortunately, this often means
that no formal plan is put in place and when
the time comes for the business to be handed
over, complicated situations can arise.
Start early for sustainable successThe key to a successful transfer of a
business, or wealth, is to start early and not
delay the planning until the point where an
exit strategy has to be implemented.
Waiting until the last minute could result in
rushed decisions and have a fundamental
impact on the future of the business.
In its Wealth Transfer Report 2017, RBC
Wealth Management surveyed 3,105 high
net worth individuals in Canada, the U.S.
and the UK, asking about financial
education and inheritance. The report
found that in all three countries, this
crucial financial education for the next
generation was delayed until they had
reached their late 20’s.
The reasons for this delay were numerous,
from the respondents not feeling prepared
enough to discuss their finances or not
being comfortable talking about their own
death, to them not believing their inheritors
were old enough or ready to learn.
The report rightly states, “Whatever the
rationale, the late age at which heirs start
learning about financial literacy
undoubtedly impacts their ability to
manage and preserve a lasting legacy.”
The right plans can ensure your business lasts longer than your lifetime.
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Why have an exit strategyThe benefit of constructing a succession
plan long before it's needed is that you
have time to work with who will
eventually take over the helm of the
company. It provides an opportunity to
pass on years of knowledge and instill a
similar ethos and vision for the
long-term future of the business.
Getting things in order in those early
years also helps family-run businesses
understand the plans and aspirations
the younger generations have. It may
come to light, for example, that a child
has little interest in taking on the
day-to-day running of a family business,
a fact the parents may not have been
aware of before they started discussing
the needs of the business following their
retirement or death.
If you are planning to pass on your shares
to your children, it is important to seek
advice from a tax specialist says
Katherine Waller, a relationship manager
at RBC Wealth Management in London.
“The current business owners need to be
aware that if they are going to be exiting
any shareholding, at any point of time,
there will be a tax charge associated
with doing so,” Waller says.
It’s not personalFor any business owner that has created
a successful company over time, having
an emotional interest in its continued
success is natural and to be expected.
In order to put a competent succession
plan in place, some potentially difficult
questions need to be addressed. “There’s
an emotional value to owning and then
gifting away a business,” Waller says.
“There may also be corporate governance
issues that need to be considered,
particularly in a family business
environment. As the owner you need to
consider what your exit will look like, how
that leaves the business and also the
emotional drain that it could have on
the business.”
She adds, “For example, you might lose
employees because they believed in the
previous management team, and that’s a
silent tax. You’re losing part of the value of
the business, by virtue of an emotional tie
to the management currently in place.”
One way to strip the emotion out of a
succession plan is to consider setting up a
trust, which is a legal relationship in which
the trustees manage and administer the
transfer of assets from one person or
company to another.
Mark Le Saint, a director at RBC corporate
employee & executive services (RBC cees),
part of RBC Wealth Management, says that
business owners need to think about the
future of their business and how it will
continue to be successful after they retire.
“As a company starts to grow, there will
come a point where the business owner
will realise they can’t grow the business
by themselves forever and require senior
support,” he says.
“The challenge for entrepreneurs is
whether they keep 100 percent for
themselves and risk losing that senior
figure expertise, or do they give up, say,
20 percent of equity and potentially be
more successful as a result?”
As with any business strategy or plan, it is
important not to simply draft it and then
forget about it. Succession plans, once put
together in the early stages of a business’s
life, should be regularly revisited to ensure
that whoever takes over will continue to
build on the success achieved so far.
One way to strip the emotion out of a succession plan is to consider setting up a trust.
Katherine Waller
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