Throughout a business’s lifecycle, directors and key personnel from companies across Perth and Australia-wide will eventually face the predicament of how best to plan for transition of ownership. This often involves succession of equity to the next generation, whether that be to family members or long-term employees. Financial considerations when buying business equity and how it can impact your personal cashflow is a key area of financial advice that is important to understand in detail. Read on for what you should consider when facing a decision to acquire an equity stake in business.
Cashflow
When you’re considering an acquisition of business equity, it’s important to consider the impact on your family’s household cashflow. There are many facets to this, and it depends on your own life stage, however some of the major variables include:
- What business income you will receive (dividends)
- The frequency and amount of repayments you will make to acquire the equity stake
- How the above two points impacts your personal tax paid each year, including any government-funded subsidies and allowances
- Timing of all of the above over the years
Knowing how you will be positioned from a cashflow perspective from one financial year to the next is key and will help you to make an informed decision. Will you have enough funds each year to cover lifestyle costs and take care of your family? These are the kind of questions you will need to address.
Structuring and finance
Structuring an equity purchase arrangement is another complex area that you will need to consider. If you need to finance the purchase, the length and how best to acquire finance will have personal ramifications on your financial position. Additionally, who owns the equity can have major implications on asset protection and future tax payable. Whether the use of a family trust, company or individual ownership is most suitable depends on your personal situation and the particulars around the company and equity on offer.
Know your business
When you buy into a business, you will essentially become part-owner and take on a greater level of risk, including the uncertainty of how your business will perform in the future. You’re investing your hard-earned dollars with view that you will continue to grow and receive a return for your investment over time. Both in the form of capital growth and income along the way.
Therefore it’ s essential that you know and understand the industry and business you work within.
It’s important to carefully assess your own financial situation and consider how much of your personal wealth you’re willing to invest in business equity. Sometimes the implications of purchasing are complex, which necessitates financial advice from a trusted adviser. The team at Boutique Advisers are experts in this area, so please reach out so we can help.
Sean Hocking works with individuals and their families to provide peace of mind and clarity around their financial future. Having a roadmap in place which clearly articulates what’s important in the years to follow gives his clients the confidence to make clear and informed decisions throughout their financial life journey.