Your Business Is Not Your Retirement Plan

For many business owners, their company is their largest asset, their main source of income and an important part of their future retirement plans.

That is entirely understandable. Building a successful business often requires years of time, energy, reinvestment and personal commitment.

However, relying too heavily on the future value or sale of one company can create risks. Your income, accumulated wealth and retirement plans may all depend on the performance of the same business.

A well-structured financial plan should therefore consider how your business fits alongside your pensions, investments, savings, property and wider family objectives.

The aim is not to separate your business from your financial plan. It is to ensure that the business forms part of the plan, rather than being the whole plan.

The concentration risk many business owners overlook

Most investors understand the importance of diversification. They would usually be cautious about placing all their savings into a single company.

However, many business owners are naturally exposed to a similar level of concentration.

Their salary comes from the business. Their dividends come from the business. A significant proportion of their wealth may be represented by the company’s value. Their future retirement may also depend on selling or transferring it.

This means that a difficult period for the company could affect the owner’s income, personal wealth and future plans at the same time.

Building assets outside the company can help reduce that reliance and provide greater personal financial security.

For existing clients, this may already form part of your wider financial strategy. However, it remains important to review the balance regularly as the value of your business, your personal assets and your objectives change.

The future value of your business is not guaranteed

Business owners will often have an idea of what they believe their company may eventually be worth.

This may be based on profitability, turnover, recurring revenue, previous offers, industry valuation multiples or discussions with accountants and corporate finance advisers.

However, the amount someone is prepared to pay can be influenced by several factors, including:

• The profitability and financial strength of the company
• The reliability of its recurring revenue
• The strength of the management team
• The company’s dependence on the owner
• The concentration of key customers or clients
• Wider economic and market conditions
• The availability of suitable buyers
• How quickly the owner wants or needs to sell

The structure of any future sale is also important.

An attractive headline valuation does not necessarily mean that the full amount will be received immediately. Part of the purchase price may be deferred or linked to future performance, client retention or the owner remaining involved for a period after the sale.

Your financial plan should therefore consider more than one possible outcome.

Build your personal balance sheet alongside the business

A successful business can generate considerable wealth, but company wealth and personal financial independence are not necessarily the same thing.

Building your personal balance sheet means gradually accumulating assets that are not wholly dependent on the future success or sale of the business.

Depending on your circumstances, these may include:

• Pensions
• ISAs
• Personally owned investments
• Cash reserves
• Property
• Other income-producing assets

The appropriate balance will be different for every business owner.

There may be valid commercial and tax reasons to retain money within a company. Equally, there can be significant benefits to gradually moving some wealth into personally owned and diversified assets.

The objective is not simply to extract as much money as possible from the business.

It is to create a coordinated strategy that considers:

• Your company’s need for working capital
• Your personal income requirements
• Tax efficiency
• Pension funding
• Investment opportunities
• Future family needs
• Your long-term financial independence

Tax rules and allowances can change, and the most appropriate strategy will depend on your individual circumstances.

Work out how much you actually need

Business owners often begin with a target sale valuation.

They may say:

“I want to sell the business for £2 million.”

But the more important question is:

“How much capital do I need to support the life I want?”

The two figures are not necessarily the same.

The amount you need will depend on factors such as:

• Your desired retirement age
• Your expected annual expenditure
• The lifestyle you want to maintain
• Mortgages and other liabilities
• Travel and major future purchases
• Financial support for children or family members
• Existing pensions and investments
• State Pension entitlement
• Tax
• Inflation
• The level of financial security you want

Detailed cash-flow modelling can help translate a broad business valuation target into a more meaningful personal financial target.

It can also help show how much may need to be built outside the company before you can afford to reduce your involvement, sell or retire.

Test different exit scenarios

A robust financial plan should not depend on one perfect outcome.

It can be helpful to consider what happens if:

• You sell the business at your preferred valuation
• You receive a lower offer
• The sale is delayed
• Part of the purchase price is paid over several years
• You retain shares and continue receiving dividends
• You step back from the business without selling
• You decide that you no longer want to sell
• Ill health or family circumstances force you to leave earlier than planned

Testing different scenarios can identify potential weaknesses while there is still time to make changes.

It can also provide reassurance.

You may discover that you do not need to achieve the highest possible sale value to maintain your desired lifestyle. That knowledge may allow you to negotiate more confidently, wait for the right buyer or choose an offer based on factors other than price alone.

For existing clients, these scenarios can be revisited as part of your ongoing planning and annual reviews.

Make the business less dependent on you

A business that can operate successfully without its owner may be easier to sell, easier to transfer and potentially more valuable.

It may also give the owner greater flexibility before retirement.

Reducing owner dependence could involve:

• Developing a capable leadership team
• Delegating key responsibilities
• Documenting important processes
• Strengthening recurring revenue
• Broadening client and customer relationships
• Improving management information
• Reducing reliance on a small number of key customers
• Creating a clear succession plan

These steps are not only about preparing the company for sale.

They can improve the quality of life for the owner, reduce pressure and make it easier to gradually step back.

The most effective exit plans are often developed over several years, rather than beginning at the point when the owner is ready to leave.

Think about what life after the business will look like

For many business owners, retirement is not simply a financial decision.

The company may have provided purpose, routine, identity, status and social interaction for many years.

Moving from a demanding working life to a complete stop can therefore be more difficult than expected.

Some owners want to sell and leave immediately. Others prefer a phased transition, a consultancy position, a non-executive role or involvement in another venture.

Understanding what you are retiring to can be just as important as deciding what you are retiring from.

Your financial plan should support the life you want after the business, rather than focusing only on the transaction itself.

Bring your professional advisers together

Business succession and exit planning may involve several different professionals, including:

• Accountants
• Solicitors
• Corporate finance advisers
• Tax specialists
• Financial planners

Each adviser may be responsible for a different part of the process, but the overall strategy should be coordinated.

A commercially attractive sale structure may not necessarily provide the cash flow, flexibility or financial security you need personally.

Likewise, your investment and retirement strategy should take account of your wider business interests, ownership structure and future exit plans.

Your company strategy, tax planning and personal financial plan should ideally all support the same long-term objectives.

More options can create better outcomes

Building wealth outside your company does not mean that you lack confidence in the business.

A successful company may remain your most valuable asset and a major part of your future financial security.

However, greater personal diversification can provide more choice.

It may allow you to:

• Step back earlier
• Reduce your working hours
• Decline an unsuitable offer
• Wait for the right buyer
• Support your family
• Manage unexpected events
• Retire without being completely dependent on a sale

The earlier you begin planning, the more options you are likely to have.

How Clarity Wealth Limited can help

At Clarity Wealth Limited, we help business owners bring their company and personal financial plans together.

For existing clients, this can include reviewing your business value, personal assets, retirement plans and changing priorities as part of your ongoing financial planning.

For those considering financial advice, we can help you understand how much you may need, assess different business exit scenarios and develop a strategy for building greater personal financial independence.

Using detailed cash-flow modelling, we can help illustrate how different decisions may affect your future and identify where changes may strengthen your overall position.

We can also work alongside your existing accountant, solicitor and other professional advisers to help ensure each part of your plan supports your wider objectives.

Existing clients are welcome to raise any of the issues covered in this article with their adviser, either at their next review or sooner if their circumstances or plans have changed.

For those who are not currently clients, an initial meeting is complimentary and provides an opportunity to discuss your circumstances, priorities and future plans before deciding whether financial advice may be suitable.

Clarity Wealth Limited is directly authorised and regulated by the Financial Conduct Authority.

The value of investments can fall as well as rise, and you may get back less than you invest. Tax treatment depends on individual circumstances and may change in the future.