Case Study Brief

When we were introduced, my client was co- running his own business - a business which was successful and growing, but one which could just as easily fall in on itself. He also needed to support his family and fund the education of his four daughters.

A robust disaster management plan was called for.

As it turned out, such a plan was indeed needed when the business hit a stumbling block, and together we mapped out a plan so he could focus on driving the business back to profitability and achieve his life and business goals.
Combining a client's values with the Financial Planning process should guarantee client engagement, and this can bring rewards that far exceed the normal client/adviser paradigm.

With this case study, I am focusing on the people, their values and the importance of a disciplined approach to the process. Above all, however, this case study is about commitment to the future.

This is a real life case study. Names and some other details have been changed to protect confidentiality.

The Case Study

Why do you want to run your own business? What motivates you to step beyond the umbrella of employment to plough your own furrow, to risk everything? An often cited reason is to take advantage of an opportunity that no one else has acted on. These opportunities are seen and often remarked upon in everyday life:
"If only management would sort that problem, then everything else would fall into place." Have you heard that before? Have you uttered it yourself? Some people choose to act on it.

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The world of risk management is all encompassing. It features in every aspect of our lives and is a way to ensure you and your family are protected now as well as planning for the future. Assessment of risk is something which affects us all on a day-to-day basis, from routine tasks to the longer-term. It is global, whatever the issue at hand.

My client, a Mr Turner, has a background in risk management specialising in re-insurance risk management systems. Some eight years ago he, together with his business partner, started a business that evaluates, administers and designs risk management systems for particular aspects of the re-insurance industry. They saw an opportunity and acted on it, quickly establishing themselves as a knowledgeable, reliable and innovative team. Some of the biggest investment banks and insurance companies use their services.

Mr Turner's circumstances are that he is aged 44, married, enjoys a decent standard of living, has properties in London and France plus their home, significant personal debt and four children under the age of 10. They spend everything they earn. As his wife gave up her career to care for their children, his is the primary income for the family.

Six years ago I was introduced to him by his accountant who saw the need for a long-term financial plan. It helped that the accountant knew about detailed Financial Planning as he was a client of mine and had seen first-hand the benefit of planning for life goals to achieve the lifestyle he wanted.

Both Mr Turner and his wife are committed to a stable family life and to personal, academic and professional fulfilment for their daughters. We discussed at length their commitment to their family lifestyle aspirations, the need for a stable and happy home for their children and their own, personal lifestyle aspirations. We then ordered them by priority level: Home and education came out on top.

We prepared a full financial plan in which the cash flow showed what he needed to do if he wanted to provide for his family and achieve all of his prioritised life goals. He became engaged by the plan, particularly the cash flow element-it gave shape to his family's future and illustrated what needed to be done. It also showed him that failure was not an option.

We talked about risk. We examined the consequences on their priorities if his business failed and agreed key assumptions, and put a robust disaster management plan in place that repaid debt on death or illness, paid an income on illness and generated capital on death. We also formed business protection plans that paid his wife a fair value for his share of the business on premature death. Further to this, we constructed savings plans and amalgamated sundry pension plans to which the business now contributed.

For planning purposes, we agreed assumptions for inflation, annualised investment growth rates, education cost inflation and the cost of borrowing. We methodically follow the six step process.

We updated wills and amended articles of association to reflect them. We also updated contracts of employment. We contemplated a shareholders agreement but did not act upon it. This is now under review.

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For a while all went well enough and plan reviews showed that progress was being made. The business was expanding but several major projects were being developed and this is what caused the plan to need revision.

When a business expands it requires more cash to oil the works. Overheads rise immediately but receipts can be delayed and project costs may not be recouped for a long time. Creditors, bills and salaries still need to be paid. Debtors may not settle invoices promptly so there may be an increased reliance on bank borrowing, asset financiers, invoice discounting and, of course, cutting costs. This can cause a cashflow problem and can, in fact, lead to the collapse of a successful business.

This was not a failing business; this was not a plan with unrealistic expectations or assumptions. In fact, this was a business that was successful and expanding, with blue chip clients, making good money which, despite everything, could collapse because it was devouring so much cash.

The proprietors cashed in all their investments and the company stopped pension contributions. Salaries were reduced and dividends stopped for six months. We revised his personal expenditure profile and the business plan, postponing planned saving for his daughters' education. At that point, we also discussed a contingency plan to maintain lifestyles in the event that the business did not expand, examining different scenarios and the possible impact on their cash flow. This included down-sizing, selling property in France and London and repaying all debt from the proceeds. In the end, both properties were kept on – the London property in particular could be a valuable capital asset in due course when the mortgage was repaid, and almost paid for itself through rental income.

Because I knew his business plan and the company prospects in great detail I was very optimistic that he would succeed and could see that all he needed was six – eight months to focus on making the business return to profitability. I could afford to forego my fee, I wanted this client to succeed, so I put the hours in gratis.

It took eight months. There was a good chance that he could secure a partial sale of a subsidiary and generate about £500,000 of profit share. That would put the plan back on track with a comfortable surplus. In the event, the partial sale did not take place because it did not need to. One client increased their orders five-fold, two of the three new projects have come to fruition with the third taking shape. His salary and dividend has doubled and the business is now likely to be worth about £10m with £1.5m in profit by the end of 2015. If the third project reaches its potential then several more millions could be added to the balance sheet. A sale is planned in about 5 years.

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Of course, all the delayed plans have to be put back on track and the lost contributions made up for. His daughters' university education will cost in the region of £450,000 (he does not want them to have a residual loan on graduation). He needs to save not less than £30,000 per annum for the next 19 years to accumulate capital for his and his wife's lifestyle requirements. In some respects the pressure is greater as his children are older, timescales have reduced and the funding requirement has increased but, to his mind, it will all be worth it if the plan works out as expected.

His commitment to planning is absolute and he does not suffer from the ego trip that many businessmen suffer from: "my business is my pension". He fully understands that his business will be the vehicle for achieving the life goals that he has been aiming for and giving his daughters the best opportunity to have the life they want. He understands that to bet everything on a sale would be just too much of a risk.

My clients draw comfort from the plan. The plan changes, numbers change, timescales change and sometimes the plan has to be re- thought. That's life. However, by discussing clients' life goals, their values and those things that really make them tick, their plan becomes the working model for them, which develops and changes along the way.

Of course, just because there is a plan does not mean that it will work. Business can be treacherous but the plan has the effect of being a companion to goals and provides encouragement that things will work out. The methodical application of the process means that every technical aspect of the plan is taken care of. It helps to give them reassurance that they are doing the right thing.

WHAT HAPPENED NEXT

My client's business is still very young but it appears to have reached a crucial milestone in that it has a number of customers providing repeat business, which will underpin the profits of the company. This facilitates a satisfactory level of salary with which to fund his goals, although good profits need to be made in order to fund expansion, ensure sufficient working capital and pay a reasonable dividend.

We meet at regular intervals to anticipate what may happen over the next six to 12 months. Significant dividends could be paid over the next couple of years, which could accelerate plan objectives. But business is treacherous and working capital requirements will always increase as the business expands.

We understand that the plan may change, perhaps significantly, over the coming years. However, we know where we are and where we want to go and, moreover, we can measure our progress to the goals.

KEY POINTS

1. It is vital to discuss
client values and their aspirations. Review the plan, continue discussing values and aspirations. Don't be afraid to talk about sensitive issues.
2. Be able to articulate what you offer and how it impacts on the lives of your clients.
3. Measure progress, revise assumptions, adapt and have faith in the future. Be disciplined in your approach to planning. When you believe, you are believed.

BIOGRAPHY

Richard Watkins CFP^CM of Close Brothers

Richard Watkins is a CFP^CM with Close Brothers Asset Management. He specialises in providing comprehensive Financial Planning advice to family businesses and high net worth individuals. He is a member of Families in Business and the International Council for Families in Business. He ran his own Financial Planning business until he sold it to CBAM in 2012. He has a law degree and has enjoyed careers at the UK stock exchange, corporate and private banking before moving to Financial Planning in 1997. He became a CFP^CM professional in 2000. He writes extensively about the need for and benefits of Financial Planning.

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0800 083 3804

www.closebrothersam.com