Bullet Proof Your Business - SME Asset Protection


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Learn how to protect the wealth that you are building within your business, with these simple yet effective asset protection strategies.

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Bullet Proof Your Business - SME Asset Protection

  1. 1. BULLET-PROOF YOURBUSINESSAndrew AndreyevIt’s a lot easierto loseassets, than it isto accumulatethem.
  2. 2. What we will cover What is „asset protection‟? What are the risks? The three strategies How to set up your companiesand trusts What happens if it all fails?
  3. 3. What we won‟t cover Asset protection is: a state of mind; and a longer-term way ofthinking There are no quick fixesAsk for first-handtestimonials of success.
  4. 4. What are we talking about?
  5. 5. What is asset protection? Keeping and protecting whatyou have In the context of ourbusinesses: The „investment‟ which the„equity‟ in our businessesrepresents; and The threat from our businessagainst our non-businesswealth.
  6. 6. The science of „risk management‟ Identifying, eliminating, lowering and managing risks What could go wrong? Is it likely to go wrong? What would be the impact? How can I avoid it going wrong? If I can‟t avoid it, how can I lower thechances of it occurring? If I can‟t stop it occurring, how can Imanage the outcomes?.
  7. 7. Some history „Modern‟ asset protectionstarted in the 1970s The Crusades and theMiddle Ages „use‟ A natural human instinct.
  8. 8. Is it moral? Is it fair to take positivesteps to protect whatyou have? Is there a limit to whatyou should be able todo? Is it a „moral‟ argument?Risk-taking v. irresponsibility
  9. 9. Irresponsibility“Not meeting your obligations to creditors”“Not paying your fair share of tax”“Endangering your employees”“Polluting the environment”“Limited liability is „unprofessional‟”There needs to be an incentive to take care.
  10. 10. You have financial andmoral responsibilities forothers, and if there are noadverse consequences foryou (because your assetsare protected), then youwould act irresponsibly.
  11. 11. Risk taking – is it worth it? We need to encouragerisk-taking The best way to do this isto give you the right tolimit what you are goingto risk when you go intobusiness Also applies to other socialactivities (charities, clubs..)Most businesspeopleare very responsible.
  12. 12. Company directors arecurrently subject to around 700different laws at federal, stateand territory levels that imposepersonal liability for theircompanys actions
  13. 13. Federal Labor agrees...…„an important deregulation initiative aimed atencouraging wealth and job creation in Australia byremoving unnecessary compliance burdens fromcompany directors and corporate officers, whereappropriate‟ would be helpful„Federal Labor Government is acting to cut red tape andremove criminal liability provisions that are inconsistentwith principles of good corporate governance andcriminal justice‟
  14. 14. COAG agrees… Miscellaneous Acts Amendment(Directors Liability) Bill 2012(NSW) Directors Liability(MiscellaneousAmendments) Bill 2012 (Tas) Directors Liability ReformAmendment Bill 2012 (Qld)
  15. 15. Should the „phoenix‟ rise? The „contrived‟ phoenix The „genuine‟ phoenix In Australia we generallydo not make thedistinction Once a „failure‟, always a„failure‟ – and probably acrook…
  16. 16. What are the threats?
  17. 17. Types of „threats‟ Operational threats risks from the core operationsof your business Internal threats threats from within yourbusiness External threats threats from things outsideyour business.
  18. 18. Operational threats Under-quoting (cost overruns) Making a defective product Giving someone the wronganswer Injuring an employee Injuring a customer/client Harming the environment.
  19. 19. Internal threats Fraud or theft Disclosure of IP, CI or KH Allowing an employee to beharassed Loss of significant resources(eg equipment and keypeople) or operationalcapacity.
  20. 20. External threats Loss of debt funding Arguing with your businesspartner Accusation of mismanagementby shareholders A change in the regulatoryregime or law Separation or divorce Physical or mental breakdown.
  21. 21. Are the risks real? “Office Christmas partycomment costs$A2.56million” “Court gives former businesspartners the right to pursue$14 million claim againstDFO founders” “Rich pickings top $5m”:PwC v Christina Rich
  22. 22. Pitt Street ScaffoldingCase Study
  23. 23. SpouseBusinessOwnerInvestment AssetsBusiness PremisesEmployeesBusiness AssetsCustomers/ClientsScaffoldingBusinessBusiness Partners
  24. 24. What can we do?
  25. 25. The fundamentals WAKE UP! Operational asset protection Minimise the risks NEGOTIATE Contractual asset protection Share the risks QUARANTINE Structural asset protection Quarantine the risksMost people start withstructural asset protectionstrategies. However, werecommend that you startat the other end – WakeUp!
  26. 26. 1. Operational Asset Protection
  27. 27. Take some responsibility These strategies limit andmanage the level of risk towhich your assets areexposed through the actionsthat you take within yourbusiness Most people do not have„legal problems‟. They havesimply failed to avoid anavoidable problem in the firstplace.
  28. 28. The risk areas The obvious: A product liability claim A workplace injury An environmental issue The more common: A cash-flow crisis causedby pilfering The loss of a keyemployee who does notfeel needed or mentoredappropriately A disgruntled businesspartner who does notthink you are pullingyour weightBusinesses get into troublewhen the owners andmanagers getcomfortable, get lazy, ordrop the day-to-daymanagement ball.
  29. 29. The most positive action you cantake to protect your assets –and particularly the assetswithin your business – is torefocus on your businessoperations.Take back responsibility!
  30. 30. Where things go wrong… Are you getting the financial information youneed to run your business? What are the key things about your business? How much does it cost to open your doors? Who are your biggest customers? Who are your most important suppliers? Who are your key employees? What is your MIS like? Start with a „blood test‟ How healthy is your cash-flow? How long does it take to collect your debtors?.
  31. 31. …where things go wrong… Does anyone have their fingers in your till? Do you have systems in place to detect variances? Who has authority to operate your accounts? Next look at your stock levels and controlsystem Is someone pinching your stock? Do you have too much stock? Is the stock too old?.
  32. 32. …where things go wrong… Employees: Do you have Job Specifications in place? Are they trained appropriately? Are they employed properly – terms, leave, etc? Are they paid appropriately – awards, conditions? Are they safe at work – OH&S? Bigger picture issues Are they the correct ones? Are you exposed to a key employee leaving? Do you need to sack anyone? Is there a sense of negativity in your business?.
  33. 33. …where things go wrong… A business does not last long without customers Are you communicating with them? Are you working for the right ones? Are they asking too much of you? Are you delivering on time and within budget? Do you have terms in place, and are they paying? Equipment How old (café upgrade)? How safe (for customers and employees)? How efficient (computers, software)?.
  34. 34. …where things go wrong… Identify your IP assets Customer lists Product specifications Financial information Marketing materials Precedents/templates Is you IP protected? Is anyone else using it? Are employees walkingout the door with it? Are they registered? Business partners: Are they pulling theirweight? Are you pulling yourweight? Are expectations clear?.
  35. 35. …where things go wrong… Do you have the right team ofadvisers and mentors? Are you doing enough marketing? How is your health? Physical MentalStrive for operational excellence.
  36. 36. Practical steps Wake Up Review the key areas ofoperational risk with yourmanagers/employees Make up a Risk Register Apply risk managementtechniques.
  37. 37. 2. Contractual Asset Protection
  38. 38. Share the load These strategies relate tomanaging risk by sharingresponsibility for the risk withother parties – who are in abetter position to managethose risks Over the longer-term, operational excellence isnot enough.
  39. 39. Terms of Trade Choose the terms on which you do business withother people Key issues: ACCA compliance Limitation of liability and warranties Passing of title/risk and insurance PPSA compliance and retention of title Guarantees.
  40. 40. Employment contracts Share the load with youremployees Protect yourcustomers, IP, phonenumbers Include a reasonablerestraint Use Job Descriptions You cant „performancemanage‟ without them.
  41. 41. General insurance Insurance is cheap – because it smoothscash-flow, and cash is king Read the fine print, or „pay‟ your brokerto do it for you: What is covered? Who is covered? When is it covered? What are the exclusions? The legal consequence ofunderinsurance Get a good insurance broker Ask them for advice Maintain an „Insurance Register‟.
  42. 42. External threats.. Constitutions and Shareholder Agreements Buy-Sell and Exit Agreements Joint venture terms with other businesses Binding Financial Agreements.
  43. 43. Practical steps Agree terms with all customers Agree terms with all suppliers Have written agreements with all employees Agree terms with all business/JV partners Maintain a „Contracts Register‟ Get a good lawyer on retainer Maintain an „Insurance Register‟ Retain a general insurance broker Get a written insurance review Maintain a „Guarantee Register‟.
  44. 44. 3. Structural Asset Protection
  45. 45. Keeping things separate Structural asset protection: Creating a boundary betweenyour wealth and the business riskyou are exposed to while buildingyour wealth These strategies seek to managerisk by: quarantining risks; and keeping wealth out of harm‟s way The „Armageddon defence‟ – notthe primary defence.
  46. 46. Getting it right the first time It is important to make the correct structure choicesfrom the outset There are a number of impediments to arestructure, including: Tax restructure costs (or impediments); and The „relation back‟ rules under insolvency andbankruptcy laws The real benefits are in the details.
  47. 47. What is your motivation? Any strategy that has „asset protection‟ as itsprimary goal will be at risk of failure due to thetests within the insolvency and bankruptcy rules Any strategy that has „tax effectiveness‟ as itsprimary goal will be at risk of failure under PartIVA and other more specific anti-avoidance rules So what is a legitimate motivation? Real Change.
  48. 48. The building blocks You Other people A company A trust A combination of the above
  49. 49. Avoid trading in your own name Personally responsible for allbusiness outcomes The „Man of straw‟ strategyworks, but personalbankruptcy is worse thancompany insolvency But if you make a habit ofbeing associated with insolventcompanies, then you will beginto be excluded from otheractivities personally.
  50. 50. Avoid partnerships Your partners have your authority to get you intotrouble You may not know what you are liable for Avoid inadvertently entering into a partnership Do not agree to share profit with others Do not ask other people to do things for you.
  51. 51. The company you keep
  52. 52. An effective business vehicle Separate legal identity Limited liability for shareholders Separation of ownership andmanagement Structured managementprinciples and accountabilities Structured relationship betweenco-owners Perpetual succession.
  53. 53. Companies A company will quarantinethe risks within the businessfrom you personally, andfrom your other investmentassets Cheap life-time insurance Will not protect you frompersonal attack
  54. 54. Business liabilityShareholder limitationappliesNo protectionof business assets
  55. 55. Personal liabilityNo protectionof share value
  56. 56. Who will be a shareholder? A shareholder is only responsible for the amountthey agree to subscribe (avoid partly-paid) Shares in a company represent the value of theunderlying assets Accordingly, the shares should be held by someonewho is not likely to be subject to attack It may be an individual, or it may be a trust.
  57. 57. Who will be a director? Limit the number of people whoare directors and choose withcare Limit the opportunity forsomeone to be a „shadowdirector‟ Give „vetos‟ to the shareholderswhich can protect their interestwithout having to be a director.
  58. 58. Practical steps Use companies to carry on businesses Limit the number of directors Hold the wealth in shares in a protected place.
  59. 59. The humble trust
  60. 60. Trusts Can be used for business orinvestments (but not both) „Two-way‟ asset protection Need to be set up correctlyto avoid the „alter egoattack‟.
  61. 61. BusinessOwnerBusiness liabilityCompany
  62. 62. BusinessOwnerPersonal liability
  63. 63. The state-of-play (Chief) Justice French on arampage Richstar, Cummins, Spry „Benefit‟ and „Control‟ (direct andindirect) Non-exhaustive, special power.., butstill not „property‟ More care needed when the trustis set up and administered Still effective, and still popular.
  64. 64. Who should be the trustee? Needs to be linked to acompany to carry on a business At-risk individuals should notbe personal trustees Trustees should not becontrolled by the appointorand at risk-beneficiary Directors of trustee should notbe controlled by the appointorand at risk-beneficiary.
  65. 65. Who should be the appointor? Ideally not just one person Build in „succession‟ and thereforehold the power with a „fiduciaryobligation‟ towards a family
  66. 66. Who should be the beneficiary? Not the person who is atrustee/appointor The children of the client Consider excluding the client
  67. 67. Contributions of wealth Need to be careful how wealthis put into a trust Division 4A of Bankruptcy Act.
  68. 68. What does it all mean? Back to the „Old-school‟ Role for professional trustees/directors/ appointors who hold theseroles as a fiduciary on behalf of afamily line.
  69. 69. Practical steps Use trusts to hold wealth Use trusts in conjunction with companiesto carry on businesses Set them up correctly, and avoidcreating an „alter ego‟ Keep trust deeds and constitutions up todate.
  70. 70. Keeping things separateStructure Strategies
  71. 71. Assets and risk - „dual‟ structures
  72. 72. „Assets‟ above „risk‟Asset EntityBusiness EntityBusinessPremisesBusinessAssetsAsset EntityBusiness EntityBusinessPremisesBusinessAssets
  73. 73. Separate „risk levels‟Holding EntityServicesAsset EntityEquipmentHireBusinessAssetsEmployees
  74. 74. Separate contracting entityHolding EntitySPV Entity(large contract)Asset Entity Business EntityContract
  75. 75. Joint VenturesHolding EntityJV ActivityAsset EntityGeneralBusinessBusinessAssetsEmployeesBusinessPartnersLess than 100%
  76. 76. Other principles Keep your structure clean andup to date. Liquidate defunctcompanies (transfer loans etc.to holding company) Keep you employees awayfrom your business andinvestment assets Setting up your companies andtrusts with defence in mind.
  77. 77. Debt is your friend
  78. 78. Use security Swap equity for debt Borrow through riskentities and use assetentities to provideguarantee security Give security over yourrisk entities first Document secured loansbetween your entities Use holding companiesas „treasury‟ vehicles.
  79. 79. Holding EntityBusiness EntityBusinessAssetsThird party debt2nd security infavour ofHolding Entity1st security infavour of BankProvidesguaranteeLoan
  80. 80. PPSA and „use‟ of assetsHolding EntityAsset Entity Business EntityBusinessAssetsBusinessAssets‘Lease’ of assetsOwnership
  81. 81. Dealing with your bank There is not a lot you can do Keep assets in separatepots, so that you can choosehow much to expose to bankobligations Watch out for standard „crosscollateralisation‟ clauses Have your home mortgage witha different bank to yourbusiness overdraft.
  82. 82. Separate asset poolsHolding EntityAsset Entity Business EntityOLD BusinessAssetsNEW BusinessAssets1st security infavour of BankLoan
  83. 83. Do restructures work?
  84. 84. What equity? Move „assets‟ to a new entity Move „equity‟ to a new entity Making distributions Creating liabilities Creating obligations Impediments Stamp duty/CGT Insolvency laws Bankruptcy laws.
  85. 85. Business EntityBusinessPremisesAsset Entity(Super Fund)Premises to SMSF• Access SBCs• Pay stamp dutyLease-back atmarket rents
  86. 86. Taking equity off the tableRegular distributionsto Holding EntityRe-investment of debtin Asset EntitySecurity in favourof Holding Entity
  87. 87. Taking equity off the tableHolding EntityAsset Entity Business EntityOLD BusinessAssetsNEW BusinessAssetsRegular distributionsto Holding EntityRe-investment inAsset EntityUse of asset byBusiness Entity
  88. 88. The Man of Straw
  89. 89. Forward and back in time Long-term consequences 3, 5 or 8 years Directorships, licences, finance… They can go back in time and recoupassets from: your creditors your spouse your trusts your super.
  90. 90. Up to 6 MonthsPreference (s.122)6 monthsClaw-backsApplication for„Sequestration Order‟„Commencementof Bankruptcy‟Act ofBankruptcyDate CreditorsPetition presentedUndervalued Transactions(s.120(1)) 5 yearsTransfer to defeat creditors (s.121)No time limitUndervalued Transactions(s.120(3)) 4 years – related entity and solventUndervalued Transactions(s.120(3)) 2 years – solvent
  91. 91. Tightening of the screws on trusts When? If you have made contributions andbenefit (Div 4A) If you have control and can benefit(Richstar) What to do: Structure appropriately Always pay full market value Document solvency at time of transfer New acquisitions are safer At-risk person pay ‘other’ expenses
  92. 92. Use super Statutory protection for lumpsums and life policies Post-2006 contributions with„main purpose‟ to defeatcreditors Pattern of contributions
  93. 93. Privacy .shhh
  94. 94. How to benefit from privacy Do not: open your mouth drive a flash car live in a nice house There are ways that you can keepthings private: Limit what you make public Use nominees and trusts Hold assets outside Australia Adopt a „document retention‟ policy
  95. 95. The benefits of „offshore‟ Better privacy Harder to enforce judgements More flexible structures Professional and experienced trusteecompanies Few tax benefits (without imprisonment) Higher costs „Non-jurisdictional‟ assets.
  96. 96. Finally
  97. 97. What if it all goes wrong? Communicate Don‟t take it personally Don‟t trade while insolvent Pay tax/SGC first Keep your powder dry for next timeBest time to implement assetprotection is when it is not needed.If you think it is or may be neededshortly, then it is probably too late.
  98. 98. How we can help Help review your business foroperational, contractual andstructural weaknesses Review and update: your contracts your structures Help you maintain your Registers Defend you if you come underattack.
  99. 99. Questions?