An entrepreneur's guide to taking your business to the next level

BusinessEssentials

Educational guide

Page 3

Contents

RBC Wealth Management is committed to helping you build a goal-based financial plan that reflects what’s most important to you. Discover how we can help you grow more than wealth.

Incentivising your employees for future successEmployee share plans – why they can be good for your business.

A clear vision of how different generations can work together can help avoid future challenges.

The right plans can ensure your business lasts longer than your lifetime.

Governance for family businesses

Succession planning for business owners

01

02

03

pg 4

pg 6

pg 10

Educational guide

Page 4

Incentivising your employees for the future

For businesses both new and established,

attracting and retaining the most talented

employees is important for ongoing success.

While competitive salaries might have

secured that talent in the past, these days

cash is not necessarily king.

Made popular in the U.S. during the 1970s

and 1980s, employee share plans have

established themselves as an essential tool

for most businesses when it comes to

recruitment and retention.

“Good news stories in America tend to

eventually come over here and in the late

1980s Britain’s companies started to put

share plans in place at the demand of their

employees,” says Mark Le Saint, director,

RBC corporate employee & executive

services (RBC cees), part of RBC Wealth

Management.

“In the past, employees were paid a salary

and perhaps beyond that didn’t really care

about anything else, as long as things didn’t

get so bad that they lost their job,” he says.

“However, by linking a proportion of an

employee’s remuneration to how the

business performs, a company is aligning

the interests of the employees with directors

and shareholders.”

Aligning your interests with your employeesDeciding to offer a share plan is the first

step, the next is finding the most suitable

type of plan for your business and for what

you are trying to achieve.

There are several types of share plan

available to business owners in the UK, such

as Company Share Option Plans (CSOP),

Enterprise Management Incentives (EMI),

Save As You Earn (SAYE) and Share Incentive

Plans (SIP), all of which are HMRC approved

and carry tax benefits. The right plan for your

business will depend on a range of factors,

such as the size and age of the company, the

type of business, the number of employees

and what it is you’re trying to achieve by

offering the share plan.

“Following discussions with advisers, a plan

can be designed specifically for your

business, depending on where you are in

your growth cycle and what the forecast for

Employee share plans – why they can be good for your business.

01

Educational guide

Page 5

the business looks like, among other

things,” Le Saint says. “Share plans can

really align the interests of employees with

the other stakeholders in the business. They

are sometimes referred to as the ‘corporate

glue’ that binds a company together.”

For private companies, an HMRC tax-

approved plan such as the EMI Share

Option Plan may be an attractive choice.

Awards granted under such a plan

typically vest on an exit, such as a listing or

sale of the business. At this point the value

of the company and its shares may have

risen in value considerably, which could

provide a significant financial gain for the

plan members. The use of such plans are a

particularly popular choice for start-ups or

businesses that cannot perhaps offer large

salaries or cash bonuses. However, through

the use of equity and a share plan, these

companies can still attract the talent they

require by offering the potential for

significant future wealth from the growth in

value of company shares.

“Even if it isn’t the type of plan where the

awards only vest on a key event, such as a

listing, awards may be based on individual

performance or simply staying employed

for a period of time, so employees can

build up a shareholding in the business,”

Le Saint says.

Consider all the outcomesOf course, there can also be perceived

downsides to the decision to implement

a share plan within a business, depending

on the existing ownership culture and how

strong the desire to change that

culture is.

Elanco Kanagasabapathy, an associate

director for RBC cees in Jersey, says some

employees will prefer the certainty of having

money to spend today, so offering shares

partly in lieu of cash could potentially

hinder employee recruitment in some cases.

Also, by transferring shares to employees

through a share plan, the owners of the

business will need to accept a level of

dilution and that the shareholder base of the

company will grow.

Where a business owner prefers that the

equity in the company remains closely held,

perhaps within the family unit, providing

shares to employees can present a dilemma.

However, one potential solution is to create

a new class of non-voting shares that are

issued to employees through the share plan.

While such shares may fully participate in

any growth of the company’s value, the

control of the company remains with the

holders of the original class of shares with

voting rights.

“Often, owners of a business have the vast

majority of their wealth tied-up in the shares

of the company,” Kanagasabapathy says. “In

such situations, an employee share trust can

be created to purchase shares from existing

shareholders, thereby creating a market and

allowing owners to realise cash from their

investment.” Such shares can then be held

in the trust to be used to satisfy awards

granted to employees under the rules of a

share plan.

“What has become clear is that if you can’t

offer some form of equity participation to

your key employees, then you are potentially

not as an attractive proposition as those

competitors that do,” Le Saint says. “Often

when talented people are looking to move or

stay, an important consideration is whether

there is a share plan in place that allows

them to benefit financially, from any future

growth in value of the company.”

Often, owners of a business have the vast majority of their wealth tied-up in the shares of the company.

Elanco Kanagasabapathy

Educational guide

Page 6

Governance for family businesses

Mixing family and business can make for a

potentially fractious working relationship.

While on the face of it running a business

with family means you can benefit from high

levels of trust and mutual commitment, this

doesn't guarantee there won't be disputes

over ownership or profit-sharing. This is why

the implementation of clear governance

structures is so important.

Setting a clear plan for the business and

establishing distinct communication lines

to deal with issues such as inheritance,

share options and changing family

dynamics can go some way to avoiding

disruptions.

Oliver Saiman, a relationship manager for

RBC Wealth Management in London, says

history has shown the majority of family

businesses don’t survive beyond the third

generation.

The foundation that a family business is

built on provides the answers to

fundamental questions such as the future

direction of the business, the strategies that

should be followed in order to ensure

continued success and how inheritance and

shares are handled as and when issues arise.

“Wealth is a highly emotive issue, which can

sometimes lead to decisions that cause

friction between family members. By

introducing a governance framework the

principal of a family can help ensure that the

family wealth remains protected” he says.

Safeguarding family wealthThere are a number of structures a

governance plan can include and it's

important that all generations understand

the intended direction of the family’s

wealth.

Some of the most common governance

options available to families include the

establishment of family offices, family

investment companies, family partnerships

or trust structures. The right structure

largely depends on the individuals and

their needs.

“Having governance in place is about

safeguarding objectivity and ensuring

fairness,” Saiman adds.

A clear vision of how different generations can work together can help avoid future challenges.

02

Educational guide

Page 7

A Family Investment Company, for

example, is simply a UK company set up

to hold investment assets where all the

shareholders are family members. The

benefit for business owners is that they

can define who are the shareholders and

distribute both voting and non-voting

shares to denote control.

However, the most effective family

governance should be designed in

reference to the specific family and

business situation rather than relying

on an “off the shelf” solution, says Gerard

Chinniah, a relationship manager at RBC

Wealth Management in Jersey

“Governance should not be created for its

own sake, it should be used more as a

stepping stone to achieving the family’s

goals, such as keeping the business in the

family or meeting certain philanthropic

commitments,” he says.

Similarly, Ben Taylor, a relationship

manager at RBC Wealth Management in

London, says that families should aim to

keep their governance structures as

straightforward as possible. “Keeping it

simple is a good first step, making it too

complicated with too many boards or

committees could end up with the

planned changes not actually taking

place,” he says. “It is important to think

about who is on that board, what happens

if someone was to die or how the family

company or wealth is protected in the case

of a family split. Without a governance

structure in place, emotions can take over

and have a considerable impact on the

future wealth of the family.”

It’s all in the designA well-designed governance structure will

provide a wide range of protections to a

family, from setting expectations and

succession planning, to preparing the next

generation to take over the management of

the estate.

It will also ensure the correct level of

decision-making within the family business

or those managing the family wealth. For

example, identifying those who can make

decisions on the running of the business on

a day-to-day basis and those that are in a

position to make more strategic decisions

on the future or how the family’s wealth

should be invested.

Other areas where a governance structure

can play an important role include the

long-term growth and sustainability of the

business or wealth. It can also set out the

procedures for family members who don’t

want to be a part of the business, or who

want to remove their portion of assets

from the pot, to exit in a fair and

harmonious manner.

“One option for families is to explore the

idea of setting up a family constitution,

which is a written document aiming to

codify the broad principles for which the

family stands, in addition to the wider

aims for the family wealth” Saiman says.

Dealing with disputesDisputes within a family business, or

concerning its wealth, can be costly and

run the risk of damaging the future of the

business and eroding the family’s capital.

A governance structure can include a

‘dispute resolution process’ that has

predefined rules to be applied when

dealing with certain matters.

This type of provision can be as simple as

specifying the procedure for dealing with a

dispute, or as detailed as naming the venue

or a person – an adviser, non-executive

director or family member – that will

preside over the process.

It can also be beneficial when dealing with

factors outside of the family, such as

regulatory changes. By detailing the family’s

strategic vision and focus through a clear

Governance should not be created for its own sake, it should be used more as a stepping stone to achieving the family’s goals.

Oliver Saiman

Educational guide

Page 8

governance structure, the risk of

investment decisions being made on an

ad-hoc, unfocused and non-cohesive basis

is vastly reduced therefore going some way

to further protect the family’s assets.

Chinniah adds, “It is important that family

governance is seen more as an evolution

rather than a revolution. There is a limit to

the speed of change that families can

absorb, so allowing members to adopt the

changes and perhaps introduce a regular

review of the governance processes in place

can help make the implementation easier.”

Educational guide

Page 9

Educational guide

Page 10

Succession planning for business owners

Building a successful and thriving

business takes a lot of time and a great

deal of effort, particularly in the early

years. But among all the growth strategies,

marketing plans and brand awareness,

there is one important piece of the

business jigsaw that is often overlooked

– a succession plan.

While a business owner may have been the

driving force behind their company’s

achievements, nothing lasts forever. The

secret to ensuring your business will

continue to be a success after your

retirement or death, lies with a well

thought out succession plan.

There is no ‘one size fits all’ solution when it

comes to succession planning, as every

business’s circumstances are different to

another. Unfortunately, this often means

that no formal plan is put in place and when

the time comes for the business to be handed

over, complicated situations can arise.

Start early for sustainable successThe key to a successful transfer of a

business, or wealth, is to start early and not

delay the planning until the point where an

exit strategy has to be implemented.

Waiting until the last minute could result in

rushed decisions and have a fundamental

impact on the future of the business.

In its Wealth Transfer Report 2017, RBC

Wealth Management surveyed 3,105 high

net worth individuals in Canada, the U.S.

and the UK, asking about financial

education and inheritance. The report

found that in all three countries, this

crucial financial education for the next

generation was delayed until they had

reached their late 20’s.

The reasons for this delay were numerous,

from the respondents not feeling prepared

enough to discuss their finances or not

being comfortable talking about their own

death, to them not believing their inheritors

were old enough or ready to learn.

The report rightly states, “Whatever the

rationale, the late age at which heirs start

learning about financial literacy

undoubtedly impacts their ability to

manage and preserve a lasting legacy.”

The right plans can ensure your business lasts longer than your lifetime.

03

Educational guide

Page 11

Why have an exit strategyThe benefit of constructing a succession

plan long before it's needed is that you

have time to work with who will

eventually take over the helm of the

company. It provides an opportunity to

pass on years of knowledge and instill a

similar ethos and vision for the

long-term future of the business.

Getting things in order in those early

years also helps family-run businesses

understand the plans and aspirations

the younger generations have. It may

come to light, for example, that a child

has little interest in taking on the

day-to-day running of a family business,

a fact the parents may not have been

aware of before they started discussing

the needs of the business following their

retirement or death.

If you are planning to pass on your shares

to your children, it is important to seek

advice from a tax specialist says

Katherine Waller, a relationship manager

at RBC Wealth Management in London.

“The current business owners need to be

aware that if they are going to be exiting

any shareholding, at any point of time,

there will be a tax charge associated

with doing so,” Waller says.

It’s not personalFor any business owner that has created

a successful company over time, having

an emotional interest in its continued

success is natural and to be expected.

In order to put a competent succession

plan in place, some potentially difficult

questions need to be addressed. “There’s

an emotional value to owning and then

gifting away a business,” Waller says.

“There may also be corporate governance

issues that need to be considered,

particularly in a family business

environment. As the owner you need to

consider what your exit will look like, how

that leaves the business and also the

emotional drain that it could have on

the business.”

She adds, “For example, you might lose

employees because they believed in the

previous management team, and that’s a

silent tax. You’re losing part of the value of

the business, by virtue of an emotional tie

to the management currently in place.”

One way to strip the emotion out of a

succession plan is to consider setting up a

trust, which is a legal relationship in which

the trustees manage and administer the

transfer of assets from one person or

company to another.

Mark Le Saint, a director at RBC corporate

employee & executive services (RBC cees),

part of RBC Wealth Management, says that

business owners need to think about the

future of their business and how it will

continue to be successful after they retire.

“As a company starts to grow, there will

come a point where the business owner

will realise they can’t grow the business

by themselves forever and require senior

support,” he says.

“The challenge for entrepreneurs is

whether they keep 100 percent for

themselves and risk losing that senior

figure expertise, or do they give up, say,

20 percent of equity and potentially be

more successful as a result?”

As with any business strategy or plan, it is

important not to simply draft it and then

forget about it. Succession plans, once put

together in the early stages of a business’s

life, should be regularly revisited to ensure

that whoever takes over will continue to

build on the success achieved so far.

One way to strip the emotion out of a succession plan is to consider setting up a trust.

Katherine Waller

This publication has been issued by RBC’s Wealth Management international division in the United Kingdom and the Channel Islands which is comprised of an international network of RBC® companies located in these jurisdictions and includes Royal Bank of Canada Investment Management (U.K.) Limited and RBC Investment Solutions (CI) Limited. You should carefully read any risk warnings or regulatory disclosures in this publication or in any other literature accompanying this publication or transmitted to you by RBC’s Wealth Management international division. This publication has been compiled from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgements as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Countries throughout the world have their own laws regulating the types of securities and other investment products and services which may be offered to their residents, as well as the process for doing so. As a result, any securities or services discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice.

This material is prepared for general circulation, and does not have regard to the particular circumstances or needs of any specific person who may read it. To the full extent permitted by law none of the entities which comprise the international division of RBC Wealth Management nor any of their affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of RBC Wealth Management.

Clients of Royal Bank of Canada Investment Management (U.K.) Limited may be entitled to compensation from the UK Financial Services Compensation Scheme if it cannot meet its obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for up to a total of £50,000. For further information about the compensation provided by the FSCS scheme (including the amounts covered and eligibility to claim) please refer to the FSCS website www.FSCS.org.uk. Please note only compensation related queries should be directed to the FSCS. RBC Investment Solutions (CI) Limited is not covered by the UK Financial Services Compensation Scheme.

This publication constitutes a financial promotion for the purposes of section 21 of the Financial Services and Markets Act 2000 (FSMA) and has been approved for distribution in the UK by Royal Bank of Canada Investment Management (U.K.) Limited.

Royal Bank of Canada Investment Management (U.K.) Limited is authorised and regulated by the Financial Conduct Authority and is entered in the register under reference 146504. Registered office: Riverbank House, 2 Swan Lane, London, EC4R 3BF, UK.

RBC Europe Limited is registered in England and Wales with company number 995939. Registered office: Riverbank House, 2 Swan Lane, London, EC4R 3BF. RBC Europe Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority for UK banking business.

Royal Bank of Canada (Channel Islands) Limited (“the Bank”) is regulated by the Guernsey Financial Services Commission in the conduct of deposit taking and investment business and to act as a custodian/trustee of collective investment schemes in Guernsey and is also regulated by the Jersey Financial Services Commission in the conduct of deposit taking, fund services and investment business in Jersey. The Bank’s general terms and conditions are updated from time to time and can be found at www.rbcwealthmanagement.com/global/en/terms-and-conditions. Registered office: PO Box 48, Canada Court, Upland Road, St. Peter Port, Guernsey, GY1 3BQ, registered company number 3295. Deposits made with the offices of Royal Bank of Canada (Channel Islands) Limited in Guernsey and Jersey are not covered by the UK Financial Services Compensation Scheme. Royal Bank of Canada (Channel Islands) Limited is a participant in the Guernsey and Jersey Banking Deposit Compensation Scheme(s). Each Scheme offers protection for ‘qualifying deposits’ up to £50,000 per individual claimant, subject to certain limitations. The maximum total amount of compensation is capped at £100,000,000 in any 5 year period. Full details are available on the Scheme’s website(s) www.dcs.gg or www.gov.je/dcs or on request. Copies of our latest audited accounts are available upon request from either the registered office or the Jersey Branch: Gaspé House, 66-72 Esplanade, St Helier, Jersey JE2 3QT, Channel Islands.

RBC Investment Solutions (CI) Limited ("the Company") is regulated by the Jersey Financial Services Commission in the conduct of investment business in Jersey. The Company’s terms and conditions are updated from time to time and can be found at www.rbcwealthmanagement.com/global/en/terms-and-conditions. Registered office: Gaspé House, 66-72 Esplanade, St Helier, Jersey JE2 3QT, Channel Islands, registered company number 119162.

RBC cees Limited is regulated by the Jersey Financial Services Commission in the conduct of trust company business in Jersey. Registered office: Gaspé House, 66-72 Esplanade, St Helier, Jersey JE2 3QT, Channel Islands, registered company number 65008. Also registered as a branch in England and Wales at 19 Canning Street, Edinburgh, EH3 8EG

RBC Trust Company (International) Limited is regulated by the Jersey Financial Services Commission in the conduct of trust company business. Registered office: Gaspé House, 66-72 Esplanade, St Helier, Jersey JE2 3QT, Channel Island, registered company number 57903.

®/ TM Trademark(s) of Royal Bank of Canada. Used under licence.

* Calls may be recorded

Start the conversation

LondonRiverbank House2 Swan LaneLondonUnited Kingdom EC4R 3BF

JerseyGaspé House66-72 EsplanadeSt Helier JerseyChannel IslandsJE2 3QT

GuernseyPO Box 48Canada CourtSt. Peter PortGuernseyChannel IslandsGY1 3BQ

For more information about our products and services, please call our relationship management team on +44-20-7002-2220* (UK) or +44-1534-501111* (Channel Islands), or visit our website rbcwealthmanagement.com

RBC1406/JAN2019