Pension Led-Funding Case Study 6: est8planning
Edinburgh-Born Neil Johnston Is No Stranger To The Concept Of Risk In Business.
Having worked for the likes of Scottish Life, Merrill Lynch and Scottish Widows in banking, insurance and compliance, he has been in the front line of evaluating and managing corporate risk. He has also experienced the tightrope of corporate employment, particularly during recession. Three redundancies and several jobs which suddenly vanished just days before starting, which has only made him more determined to maintain control of his own business and help his clients to do the same.
After His Latest Job Frustration In 2009, Neil Decided To Steer His Future In The Most Direct Route Possible
Along with his wife, Suzanne, he set up Lime Chocolate Consultancy Ltd and outsourced compliance advisors to the financial services sector. They immediately picked up a major client in the Personal Touch Financial Services Network, along with a number of other medium-sized financial organisations.
“We formed the business with no money and very little behind us,” Neil explains. “I had created my own SIPP from the pension schemes that came from my various corporate roles and, when we started the business, it occurred to me that using my pension in some way could avoid the need for an overdraft. But, at the time, I didn’t know how to do it.”
Taking The Traditional Route, Lime Chocolate Took On A Bank Overdraft
“It wasn’t ideal, but it was what we had to do to start the business,” says Neil. As the company grew, its client base also started to change. “We found we were advising more SMEs and ‘domestic’ clients; discussing tax, estates, wills and long-term care mitigation where homes needed to be protected if elderly members of the family required residential care. We were also advising a lot of smaller businesses on risk and loans.” A new brand was developing for Neil and Suzanne’s business and est8planning was born.
In talking to clients, it became evident that many business owners were dissatisfied with the banks and their approach to calling in loans, imposing restrictions or setting unrealistic fee structures. “The options had become increasingly limited for SMEs in Scotland, as they were in the rest of the UK. I’ve met owners of thriving businesses with solid employee structures, good profitability and strong development opportunities. The directors are positive about their businesses, but fearful that their bank has total control over their company through loans and personal guarantees and could pull this at any time, destroying the business overnight.”
Neil Started Exploring Funding Alternatives For His Clients
Coincidentally, he was put back in touch with Mark Johnson, an old contact from his banking days, who had joined the pension-led funding advisory firm. A single conversation opened the door to pension-led business funding. “When the conversation started, I wasn’t looking for funding for our own business, I was more interested in opportunities for my clients,” Neil explains. “But, the more I talked, the more I wanted to test it and it made sense to use in my own business. The timing was perfect because we were developing the est8planning brand and I wanted funding to spend on marketing, social media and to develop our growth plans.”
Having spent time talking to his clients about risk, Neil had to overcome his own prejudices about using his pension. “The standard response, even from my Dad, was “leave your pension alone, that’s for later”! But I knew it was sitting in a SIPP that might grow by 5% compound and that wouldn’t be big enough to give me a decent pension at 65. In reality, the biggest risk was leaving it where it was.”
Neil realised he would gain better value from using pension-led business funding to invest in the growth of his business now and putting that growth back into his pension in the longer term. The next question was how to go about it.
Neil Was Advised To Value The Intellectual Property (IP) Held Within The Business
“Because we work in financial services, my immediate response was “I don’t have any IP in the business”. But I was wrong.” Neil and Suzanne had created a franchise model for Lime Chocolate and est8planning, had a strong client database and digital assets such as their website and social media presence. An independent IP valuation offered a pleasant surprise. “The contribution of all these factors added up to a really surprising IP valuation that totalled a lot more than I expected. The SIPP only acquired IP assets to the value of 40% of the fund, although the total IP valuation was higher, and we have been able to invest in marketing the business and developing the franchise model.”
As for working with the pension-led funding advisers, Neil is very clear: “Its compliance and due diligence is credible, legitimate and business focused. There are other organisations out there that claim to understand the complexities of pension-led business funding, but this type of investment is not about directors using their pension to create a dividend for a personal spend, such as a sports car or holiday home. It’s about empowering business owners to use their funds legitimately to support their own businesses, either for growth or as working capital during difficult times. Because many of the advisory firm's employees are ex-HMRC, they give you a lot of confidence in the company and in the process."
The Outcome Was An Object Lesson In Risk Management For Neil
One Neil is only too willing to pass on to his clients. “This is a fantastic solution. I only wish I had known about it four years ago when I first needed it. If I’d dropped some of my pension funds into the business at the start, our P&L would be even better than it is now. For my clients, it’s all about education and letting them make informed decisions that add value to their business and mine. Most importantly, it’s about putting them back in control of their own companies.”
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