Buying into the business you work for
Being asked to buy into the business you work for is an amazing accomplishment. It demonstrates that you are a true asset and irreplaceable to the business. Congratulations.
If you believe the business is destined for greatness and that you can drive that greatness, then buying shares in the business can be truly beneficial, personally, professionally and financially. However, getting the cash needed together or deciding on the best way to buy in can be tricky. Your options generally include the following: 1. Use your savings or cash reserves If you have the money, this is the easiest way to buy in. It's a simple purchase of shares within the business, and most of the time, it creates the smallest amount of headaches.
But, be aware, If you use your savings or personal cash reserves, there won’t be any tax deductions available to you (even if it comes from an offset account), and it may impact any plans you had for that cash in the future.
2. Use debt to purchase shares in the business By using debt and a specific loan to purchase the shares, it becomes a business investment, and therefore any interest paid on the debt can be tax deductible. Why? Because you will be earning income or capital gains from the investment in the future.
To do this, you need a specific loan showing the investment. Using property as security is usually the best option, as banks typically love this kind of finance, meaning your interest rate will be lower. If this isn't an option, a personal loan could be. However, a personal loan typically attracts higher rates of interest. So, you should proceed cautiously and analyse whether your investment in the business will be better than the interest you'll be paying on that loan. If you can afford the principal and interest repayments and believe the business will grow in value and provide a great return in terms of dividends, it may be a good way to buy in.
3. Use a debt facility with the business as a security If the business is big enough, you may be able to use the business as security for a loan. Usually, this is only possible with long-standing and larger businesses because a bank views it as a good and stable investment, therefore being good security. Interest rates on this will typically be higher than if property was the security but lower than that of a personal loan. This approach allows you to invest without putting money down and pay off the debt over time.
4. Vendor finance Vendor finance requires an existing business owner to forward you finance for the share purchase, which you will eventually pay back, potentially out of distributions that may come to you.
It involves an agreement between you and the owner or owners. There are various ways the legal agreement or agreements can be structured, and the cost of drafting the contracts can be quite high.
It allows business owners to enable staff to have ownership in the business with no cash upfront. The business owner gives up shares or equity, and in replacement for interest on the finance facility, they establish the vendor finance loan. This is usually only the case when Options 1 and 2 are unavailable. 5. Use your superannuation Under specific circumstances, a Self Managed Super Fund can purchase shares in a business entity, provided that the members of that Super Fund do not own a controlling portion or make the controlling portion of the decisions.
This kind of investment needs to tick a few boxes, such as being at arm's length, meeting a sole purpose test (being for the sole purpose of retirement and earning income), and not triggering any related party issues. Therefore, if it is a family-run business, owners who are related to you or partners in other ventures of yours, then it will cause some restrictions. However, should this be a good enough investment, using your Superannuation to buy in could be a good option due to the tax concessions it attracts. Importantly, there is a cost to running a Self Managed Super Fund, so your superannuation fund needs to be large enough to maintain this and afford the expense. At Angel Advisory, we believe buying into the business you work for can be a great investment, especially if you believe in its future and the income growth it can generate. However, purchasing the shares through the right entity and using the right structure is extremely important to give you the best long-term gains possible. If this is an option for you and you’d like to know the best way to make it work for you, feel free to reach out to one of our experienced advisors. Happy investing. Angel Advisory Pty Ltd ABN 53 632 340 204 is a Corporate Authorised Representative of Synchron, AFS License No. 243313 Unless specifically indicated, the information contained in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek personal advice from a financial adviser.
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