Business Maverick

THE FINANCIAL WELLNESS COACH

How to structure your business to be well run after you retire

How to structure your business to be well run after you retire
(Photo: Unsplash / Dillon Gillis)

A preferred compensation plan is essentially a contract between the company and employees that is linked to an investment plan.

Question: I recall reading a column that you wrote a couple of years ago about putting a structure in place so that younger employees can buy shares in a company. I foolishly did not cut it out so forgive me for asking a similar question again. 

I’m getting to that stage where I want to become less involved in my company. I want to enable a couple of trusted employees to get a share in my business. My thinking is that if the business is well run, I will receive a sustainable income from the business when I retire. My employees will become shareholders and have a vested interest in making the business succeed over the long term. How do I go about doing this?

Answer: The structure that you are talking about is called a preferred compensation plan. It is essentially a contract between the company and employees that is linked to an investment plan. 

The way it works is that you identify those key employees that you would like to retain and become shareholders. 

You draw up an agreement with the employee or employees where you agree to increase their salary by an agreed amount. This would be invested for a period. At the end of the period, if certain agreed-upon milestones are met, the employee(s) would receive the proceeds on an agreed basis. This could be in cash, in funds to buy a shareholding in the business or a combination of cash and shares.  


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You would increase your employee’s salary by the premium for the investment plus any tax that the addition of the premium to their salary would add. It is important that they remain in a cashflow-neutral situation.  

The employee(s) would take out the investment policy and cede it to the employer as a security cession to fulfil their obligations to work at a satisfactory level for a particular period, like five years. 

At the end of the period, the employer cancels the security cession and the employee(s) will have the proceeds to buy a shareholding in the business. 

For example, if you would like a key employee to have R1-million in five years’ time to buy a share in your business, you would increase their salary so that they would have an after-tax amount of R12,000 a month to invest. This should increase by 10% a year. If the investment returned 8% a year, the investment would be worth R1-million after five years. 

This is a great way for a business owner to:

  • Extract capital from the business;
  • Attract and retain competent staff;
  • Improve BEE scores; and
  • Structure the business to continue once you retire.

By the way, if you ever wish to read my old articles, you can find them on the Daily Maverick site at this link.

Kenny Meiring MBA CFP is an independent financial adviser. You can contact him on 082 856 0348 or at Financialwellnesscoach.co.za. Please send your questions to [email protected]

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