 board how much they should hold in reserve and the conversation usually drifts toward a number: three months, six months, a year. It rarely starts with the harder question of what the money is actually for. That gap between having a figure and understanding its purpose is where many charities run into trouble.

 strategy, explains, reserves ultimately exist to give organisations financial resilience. "We expect charities to live off nothing but deliver phenomenal things," he notes, and without adequate funds set aside, that expectation becomes unsustainable.

Why Reserves Exist Beyond a Rainy-Day Fund

Reserves serve three distinct functions, according to Mesquita: managing immediate cash flow, funding planned expenditure such as an IT project or new fundraising resource, and covering genuine emergencies. The last of these has an obvious recent example. When the government raised employer national insurance contributions, many organisations faced costs they had not budgeted for 

. Charities warned the change would add roughly £1.4 billion a year to sector-wide payroll costs, hitting those employing significant numbers of staff hardest 

National Insurance: Charity Sector (Lords debate)

Preparing for 2025 budgetary constraints

's own guidance backs this framing: there is no single level or range of reserves that suits every charity, and any target should reflect the organisation's particular circumstances 

. That principle sounds obvious, yet it is routinely ignored in favour of round-number rules of thumb.

Charity reserves: building resilience (CC19)

Free Reserves: The Money With No Strings Attached

 are the simplest category to understand and, according to Mesquita, effectively enable a charity to spend money on anything that delivers its purpose, whether that is core costs or direct support for beneficiaries. There are no restrictions attached. As the saying inside the sector goes, the money is genuinely free.

This is the category most reserves policies are really describing when they quote a target figure. It excludes money tied up in fixed assets or committed to a specific purpose, leaving only what a charity could realistically draw on at short notice.

Restricted Funds and the Donor's Instructions

 work differently. A donor gives money for a defined purpose, perhaps to fund a specific piece of medical research or a cohort of PhD students, and that money must be spent accordingly. Mesquita is direct about the constraint: a trustee cannot decide it would be nicer to spend it elsewhere. Any change requires going back to the original donor to agree an alteration.

This distinction matters because restricted funds sitting on a charity's balance sheet can create a misleading impression of financial strength. A large restricted fund does nothing to help with unplanned redundancy costs or a sudden drop in unrestricted income.

Designated Funds and the Discipline of Ring-Fencing

 sit in a middle position. They are, in substance, still free reserves, but trustees or the finance team have chosen to ring-fence a portion for a particular purpose, building maintenance or a future IT project, for example. The advantage over restricted funds is flexibility: because the designation is a trustee decision rather than a donor condition, it can be changed if circumstances shift.

That flexibility is precisely why designated funds require discipline. Ring-fencing money without a clear rationale, or leaving old designations unreviewed for years, can quietly distort what a board believes it has available.

Permanent and Expendable Endowments: Balancing Today and Tomorrow

Endowments introduce a longer time horizon. With an 

 but leaves it to trustees' discretion whether to spend the income, the capital, or both, and over what period. Some charities decide to spend down a multi-million-pound endowment over a decade; others hold it indefinitely.

 is stricter and more commonly found in older, pre-war charities. "You can't spend the capital, you can only spend the income," Mesquita says plainly. This is the only category of charity money that forces trustees to balance today's beneficiaries against future ones directly, since spending too freely from income now can erode what is available for those who come later. A total return approach can soften that rigidity in some circumstances, though the detail goes beyond what most boards need day to day.

Historically, charities defaulted to round figures: three, six, nine or twelve months of running costs. Mesquita argues this is too blunt. "The best thing to do is to have a range you want as the minimum and the maximum within an organisation," he says. The more useful starting point is a charity's actual liabilities, staff costs, existing contracts and other commitments, from which a realistic minimum and maximum can be built.

Two examples illustrate why one figure cannot work across the sector. A grant-making charity funded almost entirely by investment income can operate comfortably with around six months of running costs in reserve, since its giving is entirely at its own discretion. A medical research charity dependent on fundraising faces far less predictable income and therefore needs a deeper buffer to absorb unexpected shortfalls.

Charity Commission research from the early 2000s found over £5 billion held in reserves by charities that had no reserves policy at all, a reminder that the absence of a stated rationale is itself a governance gap 

. Mesquita's broader point is that strong reserves, properly explained, should be read as a sign of resilience rather than as money sitting idle. A funder wants the organisations it supports to still exist in five years, and financial strength is part of what makes that possible.

Charity reserves (RS3)

When Trustees Get the Fundraising Conversation Wrong

The most common mistake, in Mesquita's experience, is setting an unrealistic target: a figure with no genuine prospect of being reached, or one with no clear methodology behind it. The fix is the same range-based approach already outlined, tied to actual liabilities rather than sector convention.

A related pattern is fundraising teams pushing back on reserves, arguing that a healthy balance makes donors reluctant to give. Mesquita's advice to trustees is to turn the question around: ask the fundraising department what level of reserves it believes is appropriate. "I suspect the situation actually isn't the level of reserves," he says. "It's the way you go about explaining why you have the reserves and justifying them for the organisation." Investment strategy has a role here too: reserves earmarked for genuinely long-term purposes can be invested for growth rather than left static, provided the charity's investment policy and 

Charity: Building financial resilience

Reserves policy is often treated as an accounting exercise, a number to be justified once a year in the trustees' annual report. Mesquita's account suggests the opposite: it is closer to a governance judgement, revisited whenever the charity's income, liabilities or strategic plans shift, and built on a clear-eyed view of what each category of fund can and cannot do.

Reserves exist for three practical reasons:

 cash flow, planned expenditure and emergencies, not simply as a buffer for the sake of it, as Charles Mesquita of Quilter Cheviot explains.

Free reserves, restricted funds and designated funds are not interchangeable:

 each carries different rules on who can spend the money and for what purpose.

Permanent and expendable endowments force a different kind of decision:

 trustees must balance today's beneficiaries against future ones, not just manage a cash buffer.

A single reserves figure is rarely the right approach:

 a realistic minimum-to-maximum range, built from actual liabilities, tends to serve charities better.

Pressure to cut reserves for fundraising reasons should be challenged:

 the issue is usually how reserves are explained, not the amount held.

How Much Should a Charity Actually Hold in Reserves?

 business owners assume that strong revenue and healthy profit figures are enough to attract a buyer. In practice, buyers look considerably deeper. What they are purchasing is not a snapshot of current performance: it is a stream of future income. How visible, secure and scalable that income is will determine not just whether a deal gets done, but at what multiple.

, explains, "buyers are looking for visibility and scalability from day one." Understanding where businesses fall short is decisive for any owner thinking about a 

Recurring Revenue: The First Metric Buyers Examine

 is the foundation on which valuations are built. Buyers assess it as one of the first indicators of business quality 

Global M&A trends in industrials and services: 2026 outlook

"Anything less than 50% of the total revenue mix will make people feel a little bit uncomfortable," Sykes notes. "Anything north of 65, even 70% of the revenue mix would be seen as highly desirable." A business that has allowed project or one-off revenue to dominate is signalling something about the underlying model.

The percentage alone is not sufficient. The more important question is how that recurring revenue is secured. Businesses relying on goodwill and long-standing relationships, without formal contracts, present buyers with a 

Connecting the dots: M&A deals in technology services in 2024

The absence of robust contracts is one of the most costly oversights Sykes encounters when working with owners preparing for sale.

"The quality of contracts in this sector is absolutely central," he says. Many owners justify the absence of long-term agreements by arguing the service speaks for itself. That may be true, but it misses the point. "You will not convince the buyer to ignore the risk of transitioning ownership of a business," Sykes explains.

The minimum standard is a one-year contract. The strongest businesses go further. "The best and most valuable businesses in this sector take the bolder step to try and extend for three years," Sykes adds. Introducing contracts is rarely as difficult as owners fear, it's never as difficult as they imagine it's going to be. 

The net revenue retention advantage: Driving success in B2B tech

One trap to avoid: contracts with a one-month notice period. "It's meaningless, really. It just defeats the object." Low churn reinforces the picture further. A business on three-year contracts with demonstrably low client turnover presents a materially different risk profile to one relying on informal relationships.

 are another area where businesses frequently disappoint buyers, and the cause is not always obvious.

Building a managed services client base often requires taking on mobilisation and infrastructure projects early in a relationship. These involve significant hardware sales, which carry low margins. Pure support and remote management revenue, by contrast, is very high margin.

"There's a very fine and important balance with an MSP in not doing too much project work at the expense of everything else," Sykes explains 

. A business that has leaned heavily into project delivery may present a margin profile that raises questions about the sustainability of its model. Businesses where recurring support dominates will be in a stronger position.

Driving value creation through M&A in IT services

Customer Base Size and Revenue Concentration

The size of the customer base and how revenue is distributed across it attracts close scrutiny. A business with a small number of clients, where a handful of accounts represent a disproportionate share of revenue, introduces 

 risk that buyers will price into their assessment 

Capturing M&A value: Cost, capital, and revenue synergies

"If a business has a relatively small customer base, then almost inevitably it has high revenue concentration between the top customers," Sykes notes. "That increases the risk for any buyer." The concern is straightforward: the departure of one or two key clients post-acquisition could materially alter the economics of the business purchased. A broad, diversified client base is a clear indicator of resilience and scale.

Owner Dependency: The Factor That Most Often Derails a Sale

Owner dependency is the most common reason businesses fail to achieve the outcome they were expecting.

"Any business owner in this sector who is proud of the fact that they're still the main person in terms of customer interface is going to find themselves short when it comes to actually selling the business," Sykes says.

Buyers want the opposite. "They want to know that there's structured layers of staff within the MSP that will deal with all of those problems, even the big serious ones, and that the business owner doesn't have to get involved," Sykes adds. The simplest test: the business owner should be able to step away for weeks and still have the business running without interruption.

The issue is particularly acute because most IT founders came up through technical roles and remain closely involved, often because they are the best person in the business to do so. From a buyer's perspective, this creates a clear transitional risk: if relationships and knowledge sit with someone about to leave, the business is less robust than it appears.

Internal Processes and Operational Discipline

Buyers will also examine how well the business is run operationally. Well-documented processes and clear systems give acquirers confidence that the business will hold together through a change of ownership. Buyers who see disorganisation in the back-office assume they will inherit it.

Due diligence will surface gaps quickly. The ability to demonstrate clearly how the business operates, without the owner needing to be present, is a signal of genuine institutional value.

How to Prepare: Practical Steps Before Going to Market

"You can't fix any of these things overnight," Sykes says. The businesses that achieve the strongest outcomes have begun building predictable, contracted, scalable revenue stream well in advance. Two to three years is a realistic preparation horizon.

The priorities fall into three areas. First, succession planning: if no one in the business genuinely shares day-to-day accountability, start building that capability now. Second, contract discipline: audit the revenue base, understand what percentage is genuinely recurring, and begin strengthening any weak or missing agreements. "If you're two years out from an intended sale and you've got a lack of contracts in your customer base, start working on that now on a three-year basis," Sykes advises. Third, process documentation: ensure the business can demonstrate its systems clearly to any buyer, on any given day.

"The impact on value that all of them, or to be frank, any of them would have over that period will make it well worth it," Sykes adds. The businesses that achieve the strongest exit outcomes are not the ones that begin thinking about value on the day they decide to sell. They are the ones that have been building for it.

Recurring revenue is the primary valuation driver in the MSP sector:

 Buyers in the IT and managed services space are purchasing a stream of future income, and the percentage of revenue that recurs is the first metric they examine.

Contract quality determines how much that revenue is worth:

 A strong recurring revenue figure means little without solid contracts underpinning it. Businesses with short notice periods or no contracts will struggle to attract serious buyers.

Owner dependency is one of the most common reasons businesses fall short:

 Founders who remain the primary client contact or technical escalation point create a significant transitional risk that buyers will price in, or walk away from.

Gross margins reveal the true health of the business model:

 High project and hardware revenue can inflate turnover while suppressing margins. Buyers look closely at the proportion of high-margin support revenue versus lower-margin project work.

Preparation should begin two to three years before any intended sale:

 Most factors that drive value, contracted revenue, succession planning, documented processes, cannot be fixed quickly. Early planning materially affects exit outcome.

What Buyers Really Look for When Acquiring an IT or Managed Services Business

 are often presented as sophisticated estate planning solutions. In reality, they are best understood as one option among many for families trying to balance growth, control and the gradual transfer of wealth.

Used appropriately, a FIC can play a valuable role in long-term planning. Used indiscriminately, it can introduce cost, complexity and rigidity without delivering proportionate benefit. As with most planning structures, its effectiveness depends less on the mechanics and more on whether it genuinely fits the family’s circumstances 

Family investment companies – how they work

, explains, a family investment company is simply a company structure that has been designed and used for specific 

 purposes. The structure itself is neutral. The outcomes depend entirely on how and why it is used.

 vehicles. More recently, they have gained prominence as alternatives to 

. That visibility has been helpful, but it has also encouraged the idea that the structure itself is the solution, rather than a tool that must earn its place.

Why Families Consider Family Investment Companies

The starting point for a FIC should never be 

 alone. By the time a company structure is appropriate, families have usually reached a clear conclusion that some assets will never be required to support their own lifestyle.

“There’s typically been quite a lot of advice given” before a FIC is set up, Gareth notes. Detailed cashflow modelling is normally required to establish whether assets are genuinely surplus. Without that work, families 

 transferring capital into a structure that later proves restrictive, expensive or difficult to unwind.

Where surplus assets are clearly identified, the attraction is understandable. Assets can be moved out of the estate, with future growth falling outside the inheritance tax net immediately, while the 

How can a Family Investment Company help reduce inheritance tax?

However, that benefit only matters where 

 is a material issue. For many families, estates are either too small for the tax saving to justify the structure, or sufficiently dynamic that locking assets away introduces more risk than reward.

Freezing Wealth and Accepting the Trade-Offs

FICs are often described as a way of “freezing” wealth. The intention is not to limit investment growth, but to prevent future growth from compounding the inheritance tax problem.

In practical terms, once surplus assets are transferred, any future growth on those assets falls outside the estate immediately, even though the original value remains relevant for inheritance tax during the seven-year period. This can stabilise the value of what remains taxable while allowing wealth to build elsewhere.

In practice, freezing wealth also freezes flexibility. Capital placed into a company structure is no longer readily available to meet changing needs, opportunities or unforeseen costs. That loss of optionality is often underappreciated at the outset, particularly where future spending, health or family circumstances are uncertain.

For families whose financial position is still evolving, this rigidity can outweigh the tax advantage the structure was designed to achieve.

One of the defining features of a FIC is the separation of economic benefit from control. Beneficiaries can be entitled to future growth without holding voting rights or accessing assets directly.

This is particularly appealing where families want to begin inheritance tax planning but are concerned about timing. “They want to get the assets outside of their estate,” Gareth explains, “but they maybe don’t want the beneficiary to be able to control or have any access to that asset.”

That concern is often well founded. Significant wealth transferred too early can distort incentives, reduce motivation or expose beneficiaries to risks they are not yet equipped to manage 

Family Investment Companies Unpacked: Corporate Tax and Accounting Explained

The trade-off is administration. Company structures require accounts, filings, professional advice and ongoing governance. They are more expensive and time-consuming than outright ownership, and those costs persist regardless of investment performance.

Family Investment Companies Compared With Trusts

Family investment companies are frequently compared with trusts, and in many respects they perform a similar function. Both can remove assets from an estate while preserving a degree of control.

The differences lie primarily in taxation and long-term flexibility. Trusts can trigger immediate inheritance tax charges on funding and periodic charges thereafter. For larger sums, those charges can be prohibitive. As Gareth notes, “for somebody who wants to put £10 million into a trust… they have to pay £2 million to get the money in there.”

FICs avoid those upfront and periodic inheritance tax charges, which explains their growing popularity for substantial estates.

Trusts, however, offer advantages that companies do not. They allow for classes of beneficiaries rather than named individuals, which can make them more adaptable as families grow and circumstances change. Over longer time horizons, that flexibility can be valuable 

Trusts and taxes: overview

Neither structure is inherently superior. The right choice depends on scale, complexity, family dynamics and the level of ongoing engagement the family is prepared to maintain.

One of the most common problems with FICs is that they are sometimes used because they are available, rather than because they are necessary.

Company structures are more complex than holding assets outright and harder to unwind once established. Gareth has seen situations where families received good initial advice but limited follow-up, leaving adult children constrained by arrangements that no longer serve a clear purpose.

At that point, families face an uncomfortable choice: accept ongoing cost and friction, or unwind structures that were intended to be helpful but have outlived their usefulness.

For this reason, FICs work best where there is a clear rationale for delay and a shared understanding of what will eventually change 

Family Investment Companies

A FIC can support estate planning, but it cannot replace financial education. As Gareth puts it, the structure “doesn’t solve the problem of needing to educate the next generation on wealth.”

At some point, control will pass. When it does, beneficiaries need the skills, judgement and confidence to manage what they receive. A company structure can buy time, but it does not remove that responsibility.

As Gareth notes, a FIC, like a trust or even a JISA for a younger child, can help engage the next generation in wealth and legal discussions “without them being able to physically access the money and run off down the Porsche garage.”

Family investment companies can be effective in the right circumstances. They can reduce inheritance tax exposure, protect future growth and help families manage the transition of wealth across generations.

But they are not a default solution. They are expensive to run, time-consuming to manage and inflexible once in place. For many families, simpler approaches deliver better outcomes with fewer compromises 

Wealth managers issue ‘health warning’ over inheritance tax vehicles

The real value of a FIC lies not in its technical features, but in the discipline it enforces: clarity on what is surplus, realism about control, and a willingness to plan for responsibility, not just tax.

Family investment companies are not one-size-fits-all.

 A FIC can support estate planning and wealth protection, but only where assets are genuinely surplus and long-term complexity is justified.

Tax benefits rely on integrated planning.

 Inheritance tax efficiency comes from aligning a FIC with wider business exit planning or post-sale strategy, not from using the structure in isolation.

Control comes with cost and responsibility.

 FICs offer oversight of wealth transfer, but they are expensive to run, time-consuming to manage and require ongoing professional advice.

Flexibility is reduced once assets are transferred.

 Freezing wealth inside a FIC can limit access to capital, which may create issues after selling your business in the UK or if circumstances change.

 A FIC can delay access to capital and support long-term planning, but successful wealth protection still depends on preparing the next generation.

What Is a Family Investment Company and Is One Right for You?

Client services director at Compare Wealth Managers.

Paul Dredge

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Articles from author

How Much Should a Charity Actually Hold in Reserves?

What Buyers Really Look for When Acquiring an IT or Managed Services Business

What Is a Family Investment Company and Is One Right for You?

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Paul Dredge

Bio

Articles from author

How Much Should a Charity Actually Hold in Reserves?

What Buyers Really Look for When Acquiring an IT or Managed Services Business

What Is a Family Investment Company and Is One Right for You?

Start your journey to your Financial well-being

FIND OUT MORE

LEGAL

CONTACT US

Start your journey to your
Financial well-being