Redundancy – part 3: Starting your own business after redundancy
A series of case studies on executive redundancy
Matt is 55, married with three children – one at university, two at private school – and a modest mortgage. He has 20 years continuous service as a finance sector senior manager with a Sydney-based US multinational. He has defined benefit super, insurance and shares in the company. The company is moving its regional head office to Asia, and Matt has been offered the option of working from home in Sydney or taking a redundancy.
Matt’s dream is to build a niche consulting company in the gaps where his existing firm does not compete. In a redundancy situation, the payout would significantly reduce his day-to-day cashflow needs as he could pay off his mortgage. However, Matt does not have the capital to start a new business.
Equitas Partners’ advice to Matt was to take advantage of this situation to start his own consultancy. He and his colleagues have often talked about starting their own business in this sector but there was never a trigger event and inertia kept Matt in a job where he felt safe, comfortable and well remunerated. After sitting down with Robert MacLean, Matt decided to ask for the redundancy, rather than the working from home option, which still would have left him open to the risk of future redundancy.
Based on Rob’s comparison of Matt’s financial position at age 65 for the two options, he realised Rob could package his financials so his redundancy payout effectively gave him five years equivalent at full salary because of the tax treatment and options created by his original employment agreement.
The next step was to implement a financial strategy enabling Matt to pursue his dream. Firstly, a personal super fund encompassing all key insurances was established, as well as an offset account on the mortgage so that if a redundancy occurred, the funds could be put into the offset account. Matt’s mortgage payment was changed to interest only with no payment of the principal. The interest-only mortgage means the principal is not being paid off, reducing his upfront cashflow needs. An equity access loan of $100,000 was also set up for any future capital needs on the business but was left undrawn.
Matt’s financial strategy included a plan to draw a pension at age 55 from the super fund to provide income until his business can pay a salary. The sale of his share options were deferred until the following year when Matt would most likely have a lower assessable income, and a number of assets were put in his wife’s name.
Matt’s super was established and invested so that in the event of a new job, this strategy would not change. This was done while Matt was still employed to better the chances of getting his insurance underwritten.
Furthermore, drawing an income from his superannuation provided an alternative cashflow source during the start-up and establishment phase of Matt’s business. Most importantly, his key assets were protected as part of an overall risk mitigation strategy.
Over the following three months, Matt spent time focusing on establishing his own business. He was finally offered a redundancy package and took it, and now has a growing consultancy business employing some of his colleagues who were also made redundant. In essence, Matt took control prior to the event and therefore had no disruption to his long-term wealth creation strategy.