Wednesday, 15 May 2013 12:40
Real life case study: Carl Lamb of Almary Green
Financial Planner Carl Lamb of Almary Green reflects on how he found a solution for three feuding business owners who had differing viewpoints on the future direction of their business.
Mr Brown and Mrs Green have been my clients ever since I set up Almary Green. Mr Brown is over 65 and Mrs Green is over 40 and, as business partners, work well together. They are owners and directors of Universal Merchants Ltd, along with a third director, Mr Black, who owns 38 per cent of the business. Although Mr Brown is past the state retirement age, he and Mrs Green are keen to continue to run a business together for some time to come.
However, the relationship between all three directors recently went seriously awry and they felt they couldn't continue to run the business together. Mr Black had become uncooperative and it was impacting on the business's ability to plan ahead. Mr Brown and Mrs Green decided that the only option was to buy out Mr Black.
Over the years I have come to know Mr Brown and Mrs Green well and am proud to say that they both consider me as a friend. They shared their frustration with me about the dilemma in the hope that I might have some ideas.
I sat down with Mr Brown and Mrs Green and talked about the numbers: Mr Black's 38 per cent share in Universal Merchants was valued at £300,000 – a figure that had been agreed by the company's accountant and an external accountant – so the challenge was to find a source for this funding.
They had looked at the possibility of commercial borrowing from their bank, but had agreed that the cost of borrowing via this route was prohibitive. In addition, neither Mr Brown nor Mrs Green wanted to bring in their personal assets. Universal Merchants did not own its premises and had limited tangible assets other than its successful trading book.
As their financial adviser, I knew that both Mr Brown and Mrs Green had accumulated significant sums in pension savings. Although he was over 65, Mr Brown had yet to crystallise his substantial pension fund, which stood at £450,000. Mrs Green had two funds totalling £150,000 so their combined pension assets had a value of £600,000.
I realised quite quickly that there was a solution to the problem that would fit in with everyone concerned: create an associated company, which would then become the leading business. Mr Brown and Mrs Green would then become the sole directors and shareholders of this company then transfer their pension savings into a SSAS which could then make a loan back to the new leading company. This loan could then be used to buy out Mr Black's 38 per cent share in the subsidiary company.
The new company would be the holding company with Universal Merchants as its subsidiary. This could all be achieved without the consent of Mr Black, if necessary, as Mr Brown and Mrs Green held a controlling interest in Universal Merchants.
The first step we took before going down this route was to check that they wouldn't be financially disadvantaged by transferring their respective pension funds. We were able to establish that their existing pension funds could be moved without transfer penalties and that they wouldn't be giving up any guaranteed annuity rates.
The stumbling block would be to find the appropriate security for the loan; under SSAS rules, the loan must be secured, but the business did not have physical assets against which it could be secured. Their premises were rented and their business did not involve sufficient alternative balance sheet assets that could provide the necessary security.
Clearly this could not be a straightforward arrangement; on paper it looked impossible. It needed someone to think outside the box and come up with a creative solution.
I knew that the business was a successful one and that its trading book was actually its greatest asset. In an ideal world, this would provide the perfect security for the loan – but the challenge would be to find a SSAS provider who would accept this option.
I spoke at length to SSAS providers and it became clear that many of them were uncomfortable with this type of arrangement. Of the providers we approached, all but one simply refused to consider a SSAS loan-back arrangement that did not involve property as the security. Using the trading book as a business asset was both an alien concept and unacceptable to them and they insisted on sticking to their "rules" without entertaining any idea of flexibility.
However, we did find one provider who had a "can do" attitude and were interested in trying to help – Talbot & Muir. We were delighted to find that they were prepared to listen and willing to find a workable solution. Following exhaustive discussions between the parties over a period of two weeks which involved face-to-face meetings, emails and telephone conversations, we agreed a way forward.
Accordingly, it was decided that we would create a new company and call it Browns Trading Ltd, with Mr Brown and Mrs Green as directors. Browns Trading became the holding company with Universal Merchants as its subsidiary.
Once the process had begun, we were given just one month to turn things around. The situation between the directors was fast unravelling and in danger of becoming untenable. If we hadn't been able to achieve a rapid execution of the proposed plan, there was talk of the directors suing each other.
Setting up a SSAS and arranging a loan- back normally takes two to three months, but we had to pull out all the stops to get everything completed within the agreed month. Thankfully, Talbot & Muir were willing to accelerate the process at their end and we successfully met the deadline.
Mr Black was aware of what was happening and he did seek legal advice to try and stop this. However, because Mr Brown and Mrs Green together had a controlling interest in the business, he was unable to block the process.
We then set up a SSAS for Browns Trading with Mr Brown and Mrs Green as sole members. They were appointed SSAS Trustees along with a professional trustee and then their pension funds were transferred into the SSAS as planned, giving a total fund value in the SSAS of £600,000. The SSAS was now ready to make a loan to the company.
SSAS rules allow up to 50 per cent of the SSAS value to be loaned back to the sponsoring company. This would mean Mr Brown and Mrs Green would have the £300,000 that they needed to buy out Mr Black.
Key to using the trading book as an asset was its valuation. Each party would need to be absolutely confident that the right value was being used, so this was placed in the hands of an independent accountant. The SSAS Trustees and the company's
lawyers had to be happy with the valuation before moving on to the next stage. In the end, this wasn't an issue: everyone involved was satisfied with the trading book valuation of £550,000 – which provided more than enough security for the proposed loan.
The next stage of the process was to set up the necessary charge on the trading book for the security. This was achieved by arranging a debenture over Browns Trading's asset trading book, at the agreed valuation.
Once the debenture had been set up, the SSAS provider was able to release the funds to loan to the company. The terms of the loan were standard SSAS terms: the loan would be paid back over a five year period, with interest. The interest would, of course, increase the value of the pension fund so this would ultimately benefit both Mr Brown and Mrs Green when they came to take their retirement benefits. Mr Brown and Mrs Green foresee no problems with their ability to meet the necessary repayments over the next five years.
My clients were delighted that I had been able to find a solution that took advantage of their substantial pension savings and did not involve them in costly borrowing from other sources, an option they had not been particularly keen to pursue.
Our fees for the service were based on professional time expended on their behalf and agreed with the clients who agreed that it was money well spent.
What happened next
All went according to plan and the loan funds were paid to Browns Trading. Mr Brown and Mrs Green are now in the process of putting through the purchase of Mr Black's shares in the company. Mr Black is perhaps not happy with the outcome but should be satisfied that he has exited the business with his investment intact.
Mr Brown and Mrs Green are looking forward to continuing to run their successful business for many years to come. When they do retire their pension savings will have benefited from the interest payments made on the loan.