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Understanding the Income and Share Ownership Planning (ISOP) process

In my last post I introduced the Kirkpatrick & Hopes succession planning method, ISOP – a way of gradually passing ownership of your company to your employees or family members. In this post, I’ll go into more detail about the various stages and steps involved in a typical ISOP project.

There are four key stages to ISOP planning: Clarify, Plan, Implement and Manage. In each stage, there are specific steps involved in order to ascertain goals, plan the handing over of the business, implement changes, and monitor progress on an ongoing basis.

These steps are as follows:

ISOP Stage 1: Clarify

  • Step 1: Financial health check – This is a checklist to help review your financial position. It covers all the key aspects of your finances, including accounts, tax, personal finances, and general business finances.
  • Step 2: Financial review – Here we look at the information in a typical set of statutory accounts, alongside other information that gives a greater insight into the business’ financial performance, such as the company’s true profitability and an estimate of the value of the business.
  • Step 3: Personal goals – Business planning should start with an understanding of your personal This will inform the business goals and strategy. For example, there is no point killing yourself to create a company valued at £10m if your personal income needs are very modest. Personal cash flow modelling (done by a financial adviser) is a crucial part of this step.
  • Step 4: Business goals – Having got some clarity about what your personal goals are, you can then set meaningful targets for the business. This includes setting profit and valuation targets, plus specific targets for turnover, employee numbers, size of offices, and number of customers. You can then strive for these targets knowing that they are meaningful; they are capable of delivering the financial means to meet your personal goals.

ISOP Stage 2: Plan

  • Step 5: ISOP review – Here we conduct a thorough review to decide how to structure the business’ ownership and how you will extract your income.
  • Step 6: Tax savings – One of the main advantages of ISOP is that you can benefit from tax concessions and incentives that are available to employee-owned businesses. As part of this step we calculate exactly what the tax savings are for the company and for each of the owners (shareholders/employees) involved.
  • Step 7: Business development – Good succession planning and business development go hand-in-hand. We have developed a business development programme called ‘Build for Succession’ that helps our clients through this process.
  • Step 8: Budgets and forecasts – Every business should do forecasts of profit and loss and cash flow, but when going through a period of change like ISOP, it is even more important to have a firm grip on your finances.

ISOP Stage 3: Implement

  • Step 9: Business reconfiguration – Having worked through the clarification and planning processes above, we then create a recommendation for the detailed steps that need to be taken next. The most common method here is to create a new company, owned by shareholder employees, and to pass the shares in the old company to the new one.
  • Step 10: Other advisers – As part of the ISOP process, we bring in other professionals to help in the areas where we’re not qualified (such as legal advice). We act as the ‘lead advisers’, project managing the process.

ISOP Stage 4: Manage

  • Steps 11 to 17 – These are all the accountancy and tax compliance services that are needed to support your business on an ongoing basis. For any business going through the ISOP planning process, this needs to be fine-tuned to the business’ particular needs. Because a typical ISOP project takes five years to see through, during that time, we need to closely monitor the changing circumstances of the business and the relevant tax, accounting and legal changes that may affect the original ISOP plans. 

As a succession planning method, ISOP offers you greater financial security, and it helps to secure the long-term success of your business. If you’d like to know more about how ISOP works, contact us at Kirkpatrick & Hopes.
This post is based on an extract of my book Do More of What You Love: The New Approach to Business Succession Planning, out now.

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