The importance of having the right business structure


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The importance of having the right business structure

SME MASTER PLAN SERIES – PART 1 OF 4  

This article is the first of a 4-part series aimed to help SMEs leverage opportunities to boost their business in these distressing times.

In this series, Riad Tayeh, Partner at dVT Group, covers four key areas:

Part 1   – Restructuring a business
Part 2  –  Growth through acquisition
Part 3  –  Funding for growth
Part 4  –  Selling your legacy to achieve financial freedom

In this first article, we discuss the importance of having the right legal structure for a business.   Even though a business may be set up with a particular structure, it is important to ensure that it is continually reviewed to ensure that the business assets and the business itself are properly protected from external shocks.  This becomes particularly essential as the business changes, grows, expands, where there are unforeseeable circumstances and in the unfortunate event that the business fails.

Many businesses find out the hard way that their structure is either obsolete or not suitable for their changed circumstances.  This can create issues that incur unnecessary costs or losses, that could have been avoided.  It is good practice to ensure that, at any point in time, the business always has the best protection for their assets.

What are the concerns?  

At dVT Group, we are seeing too many businesses in distress and failing to be proactive in ensuring that their business is best prepared for whatever lies ahead, good and bad.

As insolvency specialists, we can’t stress enough the importance of having the right structure well in advance, when there is no indication or thought that the business could get into financial or other difficulty.  It is simply good insurance.

We want to share our experience and work with proactive and like-minded professionals like yourself, to assist your clients remove uncertainty and to ensure they get it right.

What is the purpose of restructuring?

The need for a restructure can be triggered by changes in ownership, accumulation of wealth, sale or exit from a business, new business risks or due to personal life events or changes.

While some undertake restructuring to comply with regulations and legislative changes or solely for tax reasons, asset protection is an important reason for business owners on its own.  This is because of the importance of separating personal and business assets in case there is a claim made through litigation, either against the business owners personally or against the business.  In a more litigious world, even if these claims are spurious, they are costly both financially and reputationally.

The importance of asset protection 

Asset protection should be addressed by businesses, particularly where there are assets of substantial value.  In these cases, the right business structure can negate the incidence of risks associated with business, relationships, growth and incidental legal actions.

We are often asked to review corporate structures for asset protection.  We also notice quite a few structures where husband and wife are both the shareholders and joint directors.

When we suggest a structure involving trusts and corporate trustees with single director companies, the clients are keen to change until their accountant gives them an estimate of the taxes and stamp duties, they are likely to pay on effecting such a transaction.  The quantum of these taxes often permanently stalls a restructure.

Is now the right time?  

Entering COVID, where every dark cloud must have a silver lining.  With profits declining significantly and asset values heading south, there has never been a better time to take stock of outdated structures and look at restructuring your business.

Given these uncertain times, it may well be in the interest of some of your clients to refurbish their structures and hopefully come out the other side of this crisis in better structured shape, to enable them to leverage the future opportunities with confidence.

Of course, this will have to be assessed on a case by case basis, but if share valuations are attractive, then it may be an opportune time to upgrade to move assets into more secure structures.

What are the steps involved?    

We can work collaboratively undertaking the following steps:

  1. Business Valuation: our accredited business valuer can conduct a proper independent valuation (see our newsletter titled, How does COVID-19 impact business valuations … business-valuations) to determine a defendable fair market value of the business.  Our valuations are and can be relied on for ATO purposes.Our in-depth business valuations are in line with Australian Standards (APES 225) and ensure that the true market value of the business is used.  It also covers other issues that arise from the restructuring process to avoid any consequences or possible issues.
  2. Tax Assessment: your assessment is required to determine the likely tax payable on transitioning to an agreed new structure.
  3. Set Up: various trusts and corporate entities will need to be set up accordingly, as well as the preparation of various contracts and agreements between those entities.
  4. Considerations: we can then also assist by helping with questions that may come out of a robust discussion you need to have with your client around the present structure, such as:
  • Is it the best structure for asset protection or is there too much exposure of directors and are personal assets therefore, at risk?
  • Is it best for flexibility, contraction and growth in a changing economic climate?  For example, trusts can be great for tax minimisation, but the necessity to distribute all profits limits the ability to retain profits to fund future growth.
  • Is it an appropriate format to allow other (non-family) parties to join?  Say you want to do a management buyout for senior staff – they may not be able to participate in a family trust.
  • Does it meet aspirations or stated goals?
  1. Tax implications: calculations of the taxation implications of the existing and proposed structures and what might be the costs of changing?
  2. Other determinations:  determining if there are any industry or professional regulations around structures, which can hold licences etc?

As has been demonstrated from the current climate, the ability to be flexible and tweak operations as necessary, is vital to the ongoing viability of a business.  This flexibility includes having a structure that can readily adapt to changes in the business.

When planning ahead with your client, take the time to understand how their assets are protected and to remind them of the importance to review the structure to ensure it remains relevant to the business.  Regardless of whether it is a new business or whether the business has been trading for a while.

Author profile – Riad Tayeh

Riad is a Partner at dVT Group. He has over 30 years insolvency and accounting experience and enjoys a reputation as a tough-minded and astute practitioner, offering clients an energetic and practical approach to business solutions. He is a registered liquidator and specialises in insolvency, corporate restructure, financial investigation and turnaround strategy.

dVT Group have a proactive, practical and pragmatic approach in the way we collaborate and provide advice.  We are able to efficiently distill the issues and provide sound, common sense solutions, sometimes fitting square pegs into round holes!

If you would like to work with us to ensure you are setting up the correct business structure, please contact Riad Tayeh at dVT Group on (02) 9633 3333 or by email mail@dvtgroup.com.au.

dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.

Next month our article will be on Growth through acquisition.

 

August 2020