Building for Exit or Longevity? How to Approach Financial Planning for Your Business

Financial planning for business owners can end up being all about the business - growth, cash flow, targets, the next deal. But the real question underneath all of that is simpler: is your business actually set up to deliver the life you want?  

At First Wealth, this is what’s meant by Measure Wealth by Wellbeing. It means focusing not just on the numbers, but on what those numbers represent:  

• Holidays with family  

• The freedom to take time off, or stop working earlier  

• Funding your next business venture  

• Supporting your family, charities, or other causes you care about  

• The things that give you joy, get you into flow, or challenge you  

• Or simply maintaining the lifestyle you already enjoy, for the rest of your life  

Working out what a good life means to you means you’re not just planning to accumulate and get more, you’re planning for enough, so you can do the things you want, now and in the future. This matters for everyone, but it’s especially useful for business owners, because it can help shape the decisions you make in the business itself.  

What is all of this for?

Honestly asking yourself this question is vital if you are going to make a good plan, this is true for your business and your personal life. Having clarity of your goals ensures that all of your decisions can then all be based on moving towards these goals. 

For business owners in particular, there are regular decisions that have to be made about how to deploy capital. These decisions can have a huge impact on your future without you realising at the time. Once you have a clear goal and path ahead these decisions should become easier to make. Which has the potential side benefit of making your day to day more enjoyable. 

The important thing to always remember is that the one thing you cannot get back is time, a clear plan will help you make the most of the time you have. 

 The building blocks of wellbeing

There are many ways to approach this, but a simple starting point is Martin Seligman’s PERMA model. This suggests there are specific building blocks of wellbeing, and optimising across all of them helps deliver wellbeing while avoiding neglecting any one part.  

Positive Emotions — the things that bring you happiness, joy, calm and other positive emotions 

Engagement — where you find your focus and flow, often through your business, work or hobbies 

Relationships — the relationships you want to maintain with family, friends, colleagues and your local community 

 Meaning — your why or purpose, for many business owners this could be their business itself 

 Accomplishments — the goals and milestones you set yourself and achieve over time  

 Looking to have goals which target each of these areas ensures you have a well-rounded set of goals. It is likely you will go through periods where you have to focus on one more than the others, during start-ups for example. But ensuring you are doing this consciously and you get back to balance when you can is really powerful. 

 At First Wealth we have developed this further into a framework for Financial Wellbeing to be used alongside this. We focus on: 

•  What matters Most – usually the goals from the above 
• The Plan – how you are going to achieve those goals from a financial perspective 
• The Curveballs – what could destroy the plan and how can we defend against this 
• Financial Independence – how can we get to this point where work becomes a choice (see Know your Numbers below) 
• Loved Ones – what are your plans for your loved ones and your legacy 
• Impact – what impact do you want to make and how can we plan for this   

 Longevity or Exit?

 What is the plan for your business, are you planning to work in the business until you decide to stop working or are you planning for a quick exit? 

Determining this early on can really help how you structure and manage your business. The reality is everyone will get to exit some point, either through retirement or a sale of the business. But knowing the planned timelines ensures you are making the right decisions at the right time. 

 Know your Numbers

There are two numbers worth understanding here:  

How much does your desired lifestyle cost each month? This might not be achievable right away, but knowing it gives you a target to work towards.  

How much would you need as a lump sum to make that lifestyle affordable for the rest of your life, without fear of running out of money? This is a vital piece of information for longer-term planning, it gives you a target, helps to understand what you would need from an exit and help to provide some restriction on the standard human mindset of more more more.  

Reinvest, or Take Money Out?

This isn’t purely a financial question. It’s about weighing up what you want for your life against what the business needs, and what the opportunities are. There will always be some tension between the two, but having clarity on your personal goals and your business goals helps ease that tension.  

A few things worth considering:  

• The likely return you can expect to achieve  

• Whether anything really requires that capital, in the business or personally  

• The tax implications of each option, weighed against your goals  

One area that often gets missed: excess cash sitting in the business that isn’t needed in the short term, personally or for the business. Rather than letting it sit idle, it’s worth looking at investing it via the business rather than just in the business. This is a specialist area, so it’s worth working with your advisers and accountants, as there can be tax implications.  

The Pitfalls of an exit

A few areas that can catch people out:  

Not planning for deferred consideration - these payments may be reduced, may not happen, or may be delayed. Knowing the likely timing of these flows matters, and it’s worth planning for what happens if things change. 

Not knowing your net figure - after cash/debt-free adjustments, adviser fees, capital gains tax, and potential income tax on parts of the deal, what actually lands can look quite different from the headline figure. 

Losing Business Relief - this can cause a significant increase in inheritance tax if it isn’t dealt with sensibly and carefully as part of later planning. 

A change in circumstances - once there’s no longer a business to fund pensions, pay for protection and to provide an ongoing salary, the plan needs to account for that. Know your number! 

Currency risks, future liabilities and more - there are many moving parts to an exit and proper planning is really important to avoid these potential issues 

Getting Prepared for Exit

 There’s a lot to consider as part of an exit, and making sure you’ve thought through the impact of each area on you personally is vital. This applies just as much to retirees as it does to business sales.  

There’s a huge financial change to get to grips with, which is exactly why planning matters. But there’s other areas people don’t think about, such as the loss of structure, purpose, and mental stimulation work offers. How will that be replaced? 

For many business owners, the business has defined a large part of who they are for a long time. Working out who you’ll be once you’ve sold it is a real question, and one worth sitting with before it happens, not after. The same is true for retirees, know what you are retiring to is something we look at a lot to ensure people are prepared for these changes. 

Aligning Strategy, Wealth and Wellbeing

 Starting with your personal goals can have a genuinely powerful impact on the business decisions you make. Whether you’re planning for longevity or planning for exit, it starts in the same place: what does a good life look like for you, what will it cost, and is your business currently set up to deliver it?  

That’s the question worth stepping back and asking yourself: is your business set up to deliver the life you want?  

 If  you’d like to talk through your own numbers, or circumstances get in touch we’d love to chat.   

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.