Are you really busy finding new clients, completing paperwork, making sure your business is running like clockwork?
Are you so busy that you’ve not had time to make sure that you and your business are financially secure? In other words, if you were unable to work and your income stopped for whatever reason, would your business be able to continue?
Without having a financial safety net in place, this situation can have tragic consequences but it is easily avoidable.
Listen to what my guest Pete Matthew has to say!
Transcr
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Dylis
Hi there! This is Dylis from www.Dylisguyan.com I’m absolutely thrilled this morning to be talking to my guest Pete Matthews. Let me just tell you a little bit about Pete first.
I know that Pete’s a really great family man, he’s married, he’s got children. But what really impressed me and the reason I want to talk to him this morning is because he’s a Chartered and Certified Financial Planner and he’s the Managing Director of Jackson’s Wealth management in Penzance where he helps his clients enjoy their money by him taking the burden of financial management from them.
And in 2010 Pete launched Meaningful Money and this is a website dedicated to educating ordinary people about money. This is a brilliant site. You must go and have a look at it. www.MeaningfulMoney.tv It has over 300 videos on a range of topics and his podcast which he launched in 2012 in fact won the UK Podcast of the year in 2015. And just wait for this; it’s been downloaded over 600,000 times. That is absolutely incredible!
And the reason that I really wanted to speak to Pete this morning is because as you know, I work with business owners who sell to other businesses and I help them to attract, converge and retain more of their ideal clients.
But what I’ve seen so many times over the years is that business owners are so busy working on the businesses and they often don’t get around to putting financial safety nets in place for both themselves and for the business and this can have really devastating consequences.
I am so delighted to talk to Pete this morning. Hi Pete!
Pete
Hi Dylis! How are you doing? Great to be with you. I appreciate you having me over.
Dylis
No, it’s absolutely my pleasure. Pete, I know we’ve spoken in the past about the sort of businesses that you come across where they are so busy and they haven’t got this financial safety net in place. This is something that you see as well, isn’t it?
Pete
Absolutely! And I get why. I mean if you are say new in business, right at the start, you’re excited about the plans that you’ve got and there’s a million other things to do. Websites to set up, wages to make, your suppliers to sort and obviously customers to find, court and win. So there’s a million things to be doing and I tend to use the illustration of building a house. As I am building an extension on my house, this is very close to home but if you don’t put the correct foundations in, you can have the most beautifully elaborate, fantastic to look at building but all it’s going to take is a heavy downpour and something’s going to shift and pretty soon it’s going to come crashing down. And we can never predict when or even if that sort of disaster is going to strike but knowing that if it does come, then there is a measure of protection in place brings incredible peace of mind and actually it stops that nagging doubt. It’s not there anymore because you know that that is sorted and that even if it happens there will be some sort of protection in place. So I totally understand why people don’t get around to it but it’s incredibly prevalent, even with very well established businesses. It’s surprising how long some people leave this stuff before dealing with it.
Dylis
Yeah, exactly. So you’re talked about foundation. What are the sort of things that you see that are not in place?
Pete
Well, I mean some relevant sort of foundations. Let’s talk about protecting against disaster. It’s one of my three pillars of financial planning really. From a personal perspective, those three pillars are: to spend less than you earn, to protect against disaster and to invest wisely. It’s not any different from a business perspective but that protecting against disaster is certainly a core pillar.
The most obvious one is how important you are to the business. If you are the founder, you are the original partner or shareholder-director of the business and you are the one doing the bulk of the work then you are obviously singularly important to the business.
If the business is a little bit more developed and you have more staff and maybe you have some particularly important people, maybe the person who brings in the most sales, the person who runs the shop floor for you, there will be people in the business who are very important to it. We used to call them key men but that’s not acceptable anymore so we call them key persons.
As business owners, we need to think about what the implications might be, to the business first of all, if those people are not there anymore. So let’s sort of look at it from a small business perspective. If I have a business, what will happen to my business if I can’t function, if God forbid I get a cancer diagnosis and I need to take two years out? The obvious answer is, well if it’s something like that, who cares about the business? Well, maybe if the business is funding your lifestyle and paying the mortgage, is that going to stop? What’s going to happen then? We need to think through the financial implications. Or if the business a little bit bigger, what happens if that shop floor manager or the key designer that you’ve got is unable to work for whatever reason? What financial impacts will that have on the business? Will the business continue?
I think once we answer that, we can start to think about what we might rather do to fix it. So there is such a thing as key person insurance. So you can insure. The business pays the premium usually and you can insure if a key person dies (that’s the worst case scenario) or is off sick for a long period of time and those policies will pray a sum of money into the business. The idea is that they can either fund that person’s salary for a few months to give them the space they need to get better or more often than not to pay for a replacement person. And if it’s a bigger business then it makes a little bit more sense to pay to bring somebody else in to replace the person who’s sick or has passed away. But if it is a small business, then maybe that key person is you. There are other ways you can skin the cat if it’s a smaller business but that’s essentially what we’re talking about. Making sure there is some money on hand to make sure the business continues in some form at least if the worst is going to happen.
Dylis
And you know, earlier on I talked about having devastating consequences if business owners haven’t got these financial solutions in place. And of course I’ve got my own personal story because my father, when I was sixteen, he was ill and subsequently went bankrupt because he didn’t have any money to bring in a manager. He didn’t have any financial solutions in place to replace him, to bring someone else into the business whilst he was ill.
And the consequences of that were that he went bankrupt and he lost everything. He lost the business, his vehicles. We lost the house and we ended up in fact going to a council house. And the stress on top of him being ill just absolutely sent him over the edge. To be honest, it was absolutely horrendous. So we left this house that had a thirty-mile view across the valley, across to Durham. There’s nothing wrong with council houses by the way but there it is when you’re forced to go.
And I remember the officials. I don’t remember them coming but I remember my mother telling me that they’d said if she could borrow £300, she could buy back some of our stuff because everything had to go. They came and they valued every single thing in the house and she managed to borrow £300 from a relative and bought back some of the things that she wanted and we went off to the council house and my younger brother and sister had to change school. It was horrendous. It was absolutely horrendous! And in fact even all these years later which there are many years that have passed, it still has an emotional effect on me because I can feel how traumatic it was at the time.
Pete
These are life changing events for your father and mother but for you even all these years on, you’ve nailed it really. Are most people listening to this likely to be small business owners, maybe sole traders or is that not the case?
Dylis
They’ll be a mixture but also there will be sales people who are listening to this too.
Pete
You’ve hit sort of the next knock on really because the talk about what the impact on the business world and just hinted. One of my earliest bosses when I first became an IFA told me that really the point of his business was to throw off money that he could then put in his own name for pensions, investments, properties so that he wasn’t solely dependent on the business. And so if the business obviously isn’t functioning, then that has a knock-on effect on our personal finances which is far more severe in a sense. But there is things you can do also to protect yourself against these things happening. Obviously, life insurance is generally extremely cheap and provides a lump sum or a regular payment to the family if you are no longer around to provide for them. Critical illness insurance does a similar sort of thing but it pays out not when you’ve gone but when you’re still here but have been diagnosed with something nasty. Cancer, heart attacks, strokes.
Dylis
And you never know when this might just come across. You just never know what’s around the corner.
Pete
Insurance is a funny thing. You pay it hoping that you never need it but when you do need it, it’s an absolute godsend. I mean for instance and quite frequently, a critical illness insurance policy is quite an expensive CI but I quite often set it so that we worked out say three years worth of mortgage payments and bills were paid per client. So it’s like say 1500 quid a month, it’s 18,000 a year and three times of that’s 54,000. We would take out a critical illness policy for 54,000 and they know that if anything happens, they just need to take time out to get better, fight the disease or whatever, then they don’t worry about paying the mortgage for three years. At least it’s a little bit of a buffer zone.
I think probably the most underused kind of insurance and arguably the most valuable is called income protection. We used to call it the old days, permanent health insurance which was a ridiculous name. Income protection makes more sense. This will pay a regular income to you if you are unable to earn your income due to illness or accident. And there is usually a waiting period called the differed period. Let’s say I have this insurance and I got sick now, it could be for anything. If I put my back out and need traction for a year, whatever. From the point of which I put in the claim, the waiting period clock starts ticking and you can set that to be one day, four weeks, six months for really good sick benefits to work. So it is a very sort of flexible way and you can make it bespoke to whatever you need. Obviously the longer the differed period, the less likely it is to pay out. If you’ve got six months’ worth of money in an emergency fund, maybe you don’t need a short deferment period.
We can all think of better things to spend our money on than on insurance but I tell you what? I had a phone call from a client who was actually divorcing from his wife and they’d taken out a pretty comprehensive set of life insurance policies. But after the divorce, she had lapsed on the critical illness policy and despite repeated reminders and implications, she lapsed the policy and four weeks later was diagnosed with breast cancer. That’s a £400,000 payment that wasn’t going to pay out. And you know, she’s weeping on the phone, telling me, can we put this back in place? We wrote to you and let you know what the implications were. There’s nothing we can do. And it had significant financial implications for her and her kids. Yeah, we never need but when we do, it’s important.
Dylis
I am not sure if all of the listeners know that I was in financial services for many years as a financial advisor and as a regional director. And honestly, I was like an evangelist. I was like the Bill Graham of life insurance. You know, making sure that people have this financial safety net in place both for themselves personally and for their businesses. But if we take just income protection for example, people would say I’ve got it at work. I am covered at work. And in many cases they were covered for three or six months. But if they had a longer sickness, it literally stopped.
Pete
Yeah. Nobody is going to any favors. It will stop and then you have to wait for statutory sick pay for an agreed period of time and then that’s it.
Dylis
And then of course you’ve got the business owners who would say, well my business is my pension.
Pete
Don’t get me started on that one. I hear that all the time. My property is my pension; my business is my pension. I get that. A business is an asset. I’ve got wealth tied up in my business here in Jackson’s Wealth management in Penzance. But my old boss was right. Get the money out of the business. There is plenty of tax efficient ways you can do that to build wealth for yourself outside the business in simple exit baskets. Don’t put all your trust in the business. No matter how strong or robust it is, there is plenty of things that can go wrong. Why take that risk if you can diversify, take money out of the business and put it into a pension? There is lots of things you can do to get money out.
Dylis
Yeah, yeah. And some of the things that can go wrong in a business, to reduce the value of that business, do you want to cover some of that Pete?
Pete
Yeah. I mean there’s all kinds of things and all of them are entirely outside your control. It depends on what market you’re in but, if you are exporting, you can be massively at the mercy of exchange rates and the recent shenanigans I’m sure will impact on that. The world moves on incredibly quickly so it might be that whatever it is you’re selling or making becomes obsolete. We’re globalized as a world now so probably somebody in China or Vietnam can make what you are making more cheaply. The world is moving online. This is a conversation I frequently have with my guys and colleagues in another country who tell me that they’re convinced that the last of us will never be replaced by computers.
Am telling them you see well, it’s the hybrid form. You don’t need to see clients face to face eventually because the whole generation of people growing up is sort of a snapshot generation who really don’t want to sit in an office. They would much rather do this from home, via their iPads or whatever. So there are a wealth of things which can change a business. A good business owner will be looking for these things and looking to prevent them. But that’s not always easy when you’re in the trenches grasping at everything. One thing that you can do is to diversify your wealth outside your business into other things and the obvious one is a pension of course.
Dylis
Of course! And the other thing of course is often business owners don’t realize that they can be depending on selling their business and they might get a good value for their business. But how long is that money going to need to last them?
Pete
Yeah, sure. We are now in the realms of financial planning proper. So if anybody asks me what I do, I always say I am a financial planner. I do that for two reasons. The first is because if you tell people you are a financial advisor, they very often back off inase you are selling a pension or endowment. Most people in this country really don’t know what financial planning is. If you ask somebody in the states what a CFP (a Certified Financial Planner) then most people wouldn’t know.
So here is the thing. Very often, if somebody is setting up a business or if they’ve got a strong healthy business they will have a plan for that business. We have one here, so we’ve got our cash flow planned out for the next five years. We’ve got assumptions made, estimates on cost and things like that so we can have a sense of where we’re going to be in the future. Now obviously, the further out into the future you go, the more dependent you are on those assumptions being correct. But any good business has a plan in place, okay? Hopefully not just a dusty document sitting on the shelf but a living breathing plan for what the future might hold. So I know for example, that when we get to a certain point, I’m going to need to take on another person here, another advisor that’s going to cost me so much, that will have this impact on cash flow. That’s just good planning, right?
A lot of businesses have that. Maybe not most but a lot of businesses do but hardly any families have that. And it’s often the case where we get fantastic business owners who run an incredibly tight ship and yet they get home and their personal financial plan is sort of stuffed in an envelope in the third drawer down on the left. It is never looked at but essentially, the premise is the same.
So I spend a lot of time with clients doing what we call cash flow modeling which means nothing to clients. For clients we call it financial forecasting. Cash flow is basically taking a snapshot of where you are now financially, what you’ve got in pensions and IFA and what your business may be worth, projecting that forward into the future and then building some scenarios. What happens if you sell your business for X amount on this date? And we can use that snapshot of where we are now, some assumptions about things like growth, inflation, earnings growth and stuff like that and try to build an intelligent guess, an educated guess of where people may be at certain points.
We’ve used that moneyl in the past to help people understand what they need to get for their business or if they’re in the negotiations. We can say, well look, this amount of money is enough for you to live the lifestyle you want, to live the rest of your life. We’ve had experiences where somebody selling a business has actually accepted a lower amount because they know it’s enough, that they know that the lower bidder will do a better job of looking after their staff and clients and so they’ve been able to make that decision on the framework of their own personal finances. They know that this amount of money that they are going to get from the business sale will be enough and they only know it because we’ve run the numbers. And using some conservative assumptions they can say, well, okay, if my lifestyle costs me 75,000 grand a year and I’m going to sell my business for this, this means I can do that and live for the rest of my life comfortably in the manner in which I have become accustomed. And financial planning does that. It is not about offloading pensions and ISA’s. It’s about helping people construct a decision making framework so that they can make day to day financial decisions in life. It’s a super powerful system. Most business owners don’t do it though. Or they do it in the business but not for their personal finances.
Dylis
Yeah. And this is the thing. It’s two pronged, isn’t it? It’s looking at the business and looking at your person to make sure that you’re not subjected to those devastating consequences.
Pete
Yeah. It’s great to see your personal wealth build over time. The problem if you want to call it that is our businesses become our babies and I totally get that. I’m a business owner myself and I live and breathe this company and I want it to succeed. We’ve been in business for 90 years and I want to be in business for another 90 years. So it is a massive part of what we do but obviously given what I do for a living, I’m actually more concerned about my own personal financial planning, how I draw money out of the business tax efficiently to sort of sock away for my future so I can look after my kids and all of the stuff that I want to do.
Dylis
Yeah, absolutely. So what are the steps then that a business owner needs to take?
Pete
From day one?
Dylis
Well, from listening to this, there will be business owners who will recognize themselves in this, what are the first things that they need to stop and think about?
Pete
Okay. That’s a nicely constructed question. First of all, do what I mentioned earlier on. Consider the financial impact of anything happening to you. Or if you’re in business with somebody else, your partnership or co-directors and shareholders of limited company, what would happen? We’ve talked about insurances you can put in place to mitigate some of the impacts. Don’t neglect the importance of a shareholder partnership agreement which clearly lays out what would happen. We have one here. If I die, the shareholder agreement says that my colleagues here will buy my shares off my widow and there is a life insurance policy in place to enable them to do that. It’s very simple but it’s laid down in black and white. There’s nothing worse than uncertainty for completely screwing up a company or family which is why it’s important to make wills and stuff like that.
So understand the implications of the worst case and put things in place both legally in terms of shareholder partnership agreements and your wills and stuff like that. And don’t forget powers of attorney because if you’re a shareholder you’ve got decision making powers or if it’s your business obviously and if you’re incapacitated, knocked down by a car and suddenly can’t function, then somebody is going to have to do that for you. So the power of attorney gives somebody you trust the power to make decisions on your behalf if you are not able to. So I would bare those things in mind and consider the insurances which will help financially as well.
Dylis
Yeah, brilliant! And then of course there is the pension side to consider and investments.
Pete
Sure. And so once the foundation is in place then setting up a pension ought to be a no brainer. I mean if it’s a requirement of the law, certainly if you’ve got any employees, the auto-enrolment system, that’s in the process of rolling out now. I think by the end of next year that will be a fully enforced in all companies in UK. I mean it’s an extra cost, if you’re planning something you need to think about it. It’s not already in force for you but a pension is just such a massively tax efficient way of getting money out of the company or a partnership. The company pays money into your pension for you. It’s yours for your retirement, super tax efficiently. It grows tax free once it’s in your hands in the pension and it comes straight off the top line of the business. This is about a tax efficient way of doing it.
Dylis
And many people, if I could just say Pete, many people say, I’m not putting money into a pension because I might die before I get there and so on and so forth. But the pensions now are much more flexible.
Pete
Yeah, much more so. And if you die before retirement, before seventy five that money passes tax free to your beneficiary that you nominate. If you die after the age of seventy five, it is still incredibly flexible. It used to be that there was punitive taxation, if you died after retirement. It is much less the case now so they’re actually a brilliant way of executing some inheritance tax planning. That’s probably a subject for another day. Clients with big pension plans now, we are advising them to touch them last because there is inheritance tax payable on your property or any money in ISA’s in the bank. If pensions are IHT free, most of the banks are just holding pensions. I can understand that pensions have a bad rap but pensions these days is just another kind of savings pot. It is a piggy bank with some tax advantages. That’s basically what it is. They are a lot simpler than they used to be.
Dylis
Excellent! Pete, that’s been fantastic and I hope that the listeners have found that interesting and it’s prompted them to think, I need to go and speak to someone just to get the plans in place. Look at where they are now, where they want to be, what are the gaps and what they need to do tofill those gaps.
Pete
One of those things is that it’s easy not to get around to, isn’t? We are all busy. If anybody does this as a result of listening to this and says, I’m going to pick up the phone and ring my advisor or am going to ring my accountant and get a recommendation for a good advisor, If you’re going to see advisor, I would urge you to look for a chartered or certified financial planner. Generally, those are the ones that are at the top of their game. They spend the time getting the highest level of qualification and they are the ones which will consider your finances in the round, particularly what we call CFP which is a Certified Financial Planner. There is over eleven hundred of those in the UK and those are the cream. So I would urge folks to look for those guys because they are the ones looking at things holistically.
Dylis
And of course you’re a certified financial planner. So if anyone would like to get in touch with you Pete, how do they do that?
Pete
You can get a sense of how I think and what I believe about financial planning by going to Meaningful Money which is kind of my life’s work really. Getting decent financial information out to the world thanks to this incredible medium of the Internet. My company is Jackson’s Wealth Management. So you can just Google that but it’s jacksonswealth.com. Don’t forget the “s” at the end of Jackson’s. So jacksonswealth.com. Send an email via pete@jacksonswealth.com and I’m happy to answer any questions.
Dylis
Fantastic! Do excuse me Pete. I’ve got a bit of hay fever this morning. That has been absolutely superb and I know that you are as much an evangelist as I was in financial services, in terms of getting people to put that financial safety net in place and give them the security that they need in the future, in the case of….that money stopping for whatever reason but also getting money out of their business and into a very tax efficient vehicle like a pension or ISA’s or to looking at other investments. And as a charted financial planner, you look holistically at the whole situation and the financial planning. So thank you so much Pete. That has been brilliant
Pete
My pleasure, Dylis. Thanks so much for having me.
Dylis
Thank you very much. Bye for now Pete
Pete
Bye-bye.
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Email: dylis@dylisguyan.com
