The implementation of proper asset protection is a strategy that is often recommended, but we find is rarely followed through until it is too late. In developing asset protection strategies, we look at the entire group, identifying risks, managing these risks and ensuring that assets are not unnecessarily exposed.
All businesses benefit from asset protection strategies. Business owners who fail to plan for when things go wrong are risking everything. A good asset protection strategy will work when things are going well as when things are not as good, it will be tax-efficient and will provide flexibility to allow your business to grow.
What is Asset Protection?
Asset protection is, at its simplest, a structure that identifies and manages risks. This is achieved with the establishment of asset protection mechanisms such as asset holding vehicles, loan agreements and creating other entities that ensure proper symbiosis with the existing structure. A mistake often made is that asset protection strategies are monolithic – that they can be set and forgotten. They must evolve as the business evolves, changing as things change in the business. An asset protection strategy needs to be able to adapt, be flexible but at the same time ensure that you are protected if things go wrong.
At its core asset protection is the first step a potential business owner makes, unfortunately, it is usually the last thing considered. Meaning that when it is needed, it is too late to have a tangible impact on the overall situation.
Asset protection strategies may include:
- asset holding entities (such as trusts or companies);
- not having all family members as Directors of companies;
- personal Property Security registrations;
- preparing and executing loan agreements; and
- understanding who owns what and not blending family assets with the assets (and obligations) of the business.
Understanding that every family group is different, and every business has a different risk profile, there is rarely an off-the-shelf asset protection system that will be appropriate to protect a business. Strong asset protection strategies will be tailor made to the needs of the family group, its particular risk and the risks of the business.
Loans to your Business
All too often business owners advise us that they are owed money from their business, and then… nothing. Business owners have, for many years, been lending money to their business to continue trading but at no time have they articulated these loans, or worse they have completely failed to secure these loans – meaning that, when things go wrong, these loans are worthless.
A key aspect of asset protection strategies is to understand the advances to the business, document these and secure them against the business assets. Given statutory time limits and restrictions on perfecting PPSR agreements, this is usually one of the first things that we do when we commence a project.
Business owners have often also pledged personal assets for the business (we cover this briefly below and in our blog on cross-collateralisation but these assets may be completely unprotected.
Understanding the Personal Property Securities Register (“PPSR”) is a necessity for any business owner. It is a key aspect of asset protection and not only protects your business assets but may also ensure that if things go wrong you have a seat at the table for negotiation. We assist businesses where it was all too hard until the equipment is lost due to a lack of registration or a loan is not recoverable as it was not on the PPSR.
Developing a PPSR structure is an element of the asset protection systems implemented to protect business owners and their assets. Ensuring that they are able to enforce securities, providing a level of ranking security and, if necessary, voting in an insolvency event.
You can read more about the PPSR in our overview here.
Working with business owners, and in the development of asset protection strategies, we ask a question that seldom has a known answer: have you signed a personal guarantee? Most finance agreements now have a charging clause or a right to take security over the personal assets of a Director or owner of a company. It is usually buried deep in terms of trade or finance agreements and only comes to light when things go awry.
Understanding these obligations is a core component of asset protection systems as these may need to be mitigated, re-financed or removed depending upon the nature of the business.
Who Owns What?
Business owners can struggle to differentiate between their assets and those of their business as there is rarely a clear delineation. For a business owner in trouble, working this out at the end may be too late for coherent asset protection strategies. Asset protection involves the use of appropriate structures, defining ownership of assets and then ensuring that the correct mechanisms are placed over these assets to ensure that they are protected.
A business owner, in the haste of signing up for finance or supply agreement, may provide the ability for the lender to take security over all their assets, or personal assets can be pledged for business borrowing. This is known as cross-collateralization. In developing asset protection strategies, these cross-collateralization agreements can severely inhibit the protection of family assets as, in effect, someone got in first.
Managing cross-collateralization risk is a core aspect of developing an asset protection system and we work closely to understand the risk that has been added to the overall situation through agreements that have been signed.
Understanding your Risk
A business owner faces risks from all sides. It is normal to not easily identify the risks that are faced and when working with business owners we invest a lot of time getting an understanding of who and what could impact the business.
Our asset protection strategies always commence with risk analysis, looking at agreements, reviewing the terms of trade and then getting a measure of your business to see where the gaps are. Sometimes risks pop up from nowhere, such as an unknown agreement or a misunderstanding of what has been signed. These can be devastating when things go wrong.
Some risks are not simple to identify or understand, looking at your business it is not only trading risk, but it may also be a legislative risk, technology or competitor and without appropriate asset protection strategies, it may just be that you are exposed without the tools to manage this.
Risk Mitigation and Risk Control
Asset protection is not just having a trust. A common misconception is that a trust will protect your assets on its own, this is rarely the case and reliance on this can be difficult for when things go wrong. We cover the issues in establishing trust without the accompanying planning and asset protection strategies.
We develop risk mitigation and risk control asset protection strategies with all the information at hand, for mature businesses this may be more mitigation than complete removal, whereas new businesses have a unique opportunity to risk management with a clean slate and time to put the correct structures in place.
Understanding the role of risk in your business is not to delay, restrict or limit, rather it is to allow the business to run without needing to continually worry about things that can be mitigated with asset protection strategies.