“Given how important local businesses are in terms of job creation, it is vital to support the individuals who establish and run these businesses,” says Alan Wellburn, Head of Wealth at Standard Bank Wealth and Investment SA. “This includes enabling them to build and preserve their personal wealth.” 

Risk versus reward 

Wellburn says that it is useful to distinguish between building wealth and preserving wealth, as they are very different but equally necessary. 

“Starting a business would be considered as building wealth,” says Wellburn. “It is typically subjective, requiring one’s time and energy, and is quite often concentrated in one sector, region, or industry. It often comes with a high level of risk, but with the opportunity to generate excess returns and build one’s wealth.” 

“When preserving wealth, one tries to be more objective, making use of asset managers or index funds to allocate capital,” Wellburn continues. “It doesn’t require your time or energy and should ‘grow while you are sleeping’. These investments should also be less concentrated and well-diversified over regions, sectors and asset classes. They should provide a return at a lower level of risk.” 

When running a business, one’s focus is typically on building the business and building wealth, but it is equally important to find opportunities to allocate funds to preserving wealth. “This can be done monthly, or as lump sums when dividends are declared and distributed,” says Wellburn. “It is also essential to consider doing this when there is a liquidity event, such as when a business, or a portion of a business, is sold.” 

Hope for the best, prepare for the worst 

According to Wellburn, it is essential to ensure that the appropriate structures are put in place with regard to the ownership of a business. “This is important for a number of reasons, such as separating personal assets from business risk to ensure that business ventures do not destroy personal wealth.” 

“Not paying appropriate attention to succession planning and estate planning can have unintended consequences which can sometimes be very undesirable,” he continues. “An example of this is an entrepreneur who held the shares of his very successful business in his personal capacity. When he passed away, his family was forced to sell the business to settle debt, and pay capital gains tax (CGT) and Estate Duty.” 

“Starting and growing a successful business is often the result of individuals with different and complementary skills coming together,” adds Wellburn. “However, if your business partner leaves their share of the business to a spouse who does not have the same skill set, it can be a challenge to continue to run a business with them. It is therefore important to put measures in place to mitigate this risk.” 

This may be a simple ‘Buy and Sell’ agreement with the appropriate risk solutions to provide the financial resources for the surviving business partner to buy out the deceased business partner’s interest. This also provides the spouse of the deceased business partner with the financial resources to support their lifestyle without having to suddenly become an expert in a business they may not be interested in. 

A commitment to the future 

“At Wealth and Investment, we recognize that while local businesses are very important, the real heroes are the people who start and run them,” says Wellburn. “We are committed to supporting them with bespoke solutions and quality advice that will enable them to build and preserve their personal wealth, and leave a lasting legacy for future generations.”