There comes a moment in the life of every serious trading concern when the question ceases to be whether it is profitable and becomes instead whether it is durable. I have sat at too many boardroom tables where a business valued at fifteen million pounds, turning over handsomely and reporting two million in EBITDA, is spoken of with the satisfied air of a man admiring his own reflection, only to discover that beneath the polish the structure remains little more than an extension of its founder’s nervous system.
Profit is not permanence. Valuation is not architecture. And the habit of conflating the two is precisely how otherwise intelligent owners build something impressive yet fundamentally mortal. The paper from which this Dispatch takes its bearings made that case plainly . What follows is the practical unfolding of the first two architectural moves, written not as a technical memorandum but as a considered appeal to those who understand that the purpose of enterprise is not merely to trade well but to endure.
We shall use a fixed example throughout, not because it is dramatic but because it is typical. A group valued at fifteen million pounds, composed of a ten million pound core trading company, three million pounds of commercial property and two million pounds of speculative or non core ventures. It is a fine creature. It is also structurally naïve.
Part I
Fixing the Inheritance Problem Without Selling the Business
The great error at this level of value is to treat inheritance tax as a future irritation rather than as a present design constraint. At five million pounds one may indulge that fiction. At fifteen, one cannot. Every profitable year enlarges the estate. Every increment of growth compounds a liability that appears not at a convenient moment but at death, that most inconsiderate of events, which consults neither market conditions nor family readiness before arriving.
I recall a founder, a man of sharp commercial instinct and considerable charm, who told me with some pride that he had deferred “all that estate stuff” because Business Property Relief would, in his words, take care of it. I asked him, gently, whether he believed reliefs were geological formations or political constructs. He did not enjoy the question.
The point is not that inheritance tax can be eliminated, nor that one should gamble on legislative benevolence. The point is that growth must be prevented from compounding personal exposure indefinitely. The question is not how to reduce the tax but how to stop success from enlarging the problem.
The structural solution is disarmingly simple in principle and profoundly stabilising in effect. A Self-Administered Family Office is inserted above the existing group. The founder exchanges his or her shares for fifteen million pounds of capital participation shares issued by that vehicle. No assets move. No contracts are disturbed. No client notices so much as a tremor.
What changes is the economic behaviour of the system.
Capital participation shares do precisely what their name suggests. They fix value. The founder now holds fifteen million pounds of defined economic entitlement that does not participate in future growth. However brilliantly the trading group performs, however enthusiastically the EBITDA expands, the personal estate does not swell in tandem. The link between enterprise and inheritance exposure is severed at source.
Under present UK rules, the exposure on that frozen value can be calculated with a clarity that owners rarely experience. A portion qualifies for Business Property Relief. The balance is exposed at an effective rate that produces, in our example, a maximum inheritance liability in the region of two million pounds .
Two million pounds against a two million pound EBITDA business is not trivial. It is, however, finite. More importantly, it is stable. It does not grow each year like an untended hedge. It does not depend upon the founder’s continued good health or the political climate of the day. It becomes a number that can be planned for, funded against or insured with deliberation rather than panic.
I have observed the psychological shift this produces. Once the ceiling is fixed, conversations alter in tone. Expansion is no longer shadowed by private anxiety. Strategic decisions cease to be distorted by the unspoken fear that every successful contract is merely inflating a future tax bill.
Future growth, of course, must reside somewhere. That growth is captured in separate growth shares, typically held within discretionary trusts or long-term family vehicles designed for continuity. From that moment forward, success enriches the institutional structure rather than the personal estate. Control remains with the founder. Governance remains intact. But the economic upside has been decoupled from mortality.
It is a subtle rearrangement. It is also the point at which a business begins to behave less like a possession and more like a system.
Nothing operational has yet changed. The same staff arrive on Monday morning. The same customers pay their invoices. The trading group appears untouched. Yet internally, the most destabilising variable has been bounded. The calendar has lost its tyranny.
Only once this ceiling is installed does it make sense to address the next weakness, for until inheritance exposure is fixed, every other decision is taken under the shadow of compounding risk.
Part II
Removing £5m of Risk Without Touching the Core Business
With inheritance exposure stabilised, the second fragility becomes impossible to ignore. Our exemplary group still houses three million pounds of commercial property and two million pounds of speculative ventures within the same legal environment as the core trading activity. It is as though one had placed fine china and laboratory chemicals on the same shelf and hoped that neither would be disturbed.
A trading company should be, in the most dignified sense of the word, dull. It should employ staff, execute contracts, deliver goods or services and collect revenue. That is its discipline. When property ownership and experimental capital allocation are placed within the same corporate shell, correlation risk is invited in by the front door.
Commercial property appears solid, almost reassuring. Yet when it resides inside a trading entity, it becomes hostage to operational events. A serious customer dispute can freeze assets. Litigation can entangle balance sheets. Financing discussions become muddied by the presence of bricks and mortar that have nothing to do with contract execution. A perfectly sound building is rendered vulnerable to a defective clause in a services agreement.
I once encountered a group in which a single disputed contract resulted in an injunction that paralysed not only the operating company but also the property from which it traded. The building had committed no offence. Yet there it sat, legally entangled, because no one had thought to ask whether different risk profiles ought to inhabit different containers.
The same principle applies, with greater volatility, to non core ventures. Early-stage ideas burn capital unpredictably. They pivot, they stumble, they fail more often than they succeed. When such ventures are housed within a profitable trading group, their losses contaminate core performance and management attention is divided between execution and experimentation.
Institutions do not do this. They segregate.
The corrective measure is neither dramatic nor theatrical. It involves moving each commercial property into its own special purpose vehicle, an entity that owns the building, undertakes no trading and employs no staff. These property vehicles are then placed under the Family Office structure. The trading company becomes a tenant, paying rent on arm’s length terms.
Immediately, the property is insulated from trading disputes. The trading balance sheet is simplified. Financing discussions become more intelligible. The building ceases to sit in the firing line of operational risk.
In parallel, each non core venture is placed within its own defined vehicle, capitalised to a predetermined limit and structurally incapable of contaminating the core business. These vehicles, too, are lifted into the Family Office layer. Success may scale. Failure is contained.
After these moves, what remains within the trading group is precisely what ought to be there: the ten million pound core business engaged in the sober business of contracts, staff and delivery. No property. No experiments. No long-term holdings whose risk profile diverges from the daily act of trading.
The transformation in resilience is disproportionate to the apparent modesty of the steps. A customer dispute can no longer imperil property. A failed venture cannot quietly erode core profitability. The balance sheet becomes legible. The risk becomes local rather than systemic.
It is worth noting what has not occurred. No investor has been introduced. No share has been sold. No operational routine has been disrupted. From the outside, the group appears much as it did before. Yet internally, five million pounds of assets have been removed from correlated exposure.
I often tell founders that clarity is a form of control. Once property, experimentation and trading are no longer entangled, conversations sharpen. Management focuses on execution. Ownership focuses on allocation. The blurred lines that so often characterise owner managed groups begin to resolve into disciplined boundaries.
At this juncture, inheritance exposure is fixed. Non core risk is segregated. The trading group stands cleaner, narrower and more comprehensible. It is not yet a full institution. But it has ceased to behave like a personal asset dressed up as a company.
The next stage will address the internal architecture of the trading activity itself. For even a ten million pound core business, if housed within a single legal shell, remains vulnerable to concentrated failure.
Institutions are not built by rhetoric. They are built by sequence. And sequence, when applied with patience and a certain ruthlessness about correlation, is what converts a successful business into something capable of outliving its founder.
