The most important number in an entrepreneur’s head is usually the offer they require to sell up and retire comfortably. Watching your company flourish and grow can be an exhilarating experience and part of that thrill is knowing that your efforts are making you wealthier. You have built something valuable and one day the time may be right to reap the rewards and enjoy a slower pace of life. But pinning down your preferred business valuation takes work and getting it wrong could have serious implications for your future. Careful planning is a necessity.
Calculating your magic number will involve mapping out your future financial requirements. Every entrepreneur has a vague idea about how they want to spend their time after selling up, but approaching this question methodically could save you a lot of frustration later on. You will want to maintain a certain lifestyle and enjoy financial freedom, but may also want to financially assist family members. There may be charities you want to support or significant purchases that you want to make like property. You may even have plans to seed a new business venture and start all over again. Whatever the plan, it is useful to know how much it will cost.
The value of planning
It is important to start thinking about financial planning as early as possible. The earlier you begin, the less chance you have of being unpleasantly surprised at a later date. Cash flow modelling is an excellent way to plan out your finances. Cash flow models examine your assets and debt along with income and expenditure. Projections can then be created on your future finances. Using a tool such as this can bring valuable clarity to your finances and ensure you have a clearer picture of what your future will bring. Another useful tool for wealthy individuals who want to get a clearer view of their finances is consolidated reporting. Entrepreneurs can find that their financial lives become increasingly complex with multiple accounts and investments spread across different jurisdictions. Consolidated reporting provides a full picture of someone’s wealth by creating a financial statement that brings everything together. This approach gives you an umbrella view of your financial situation and makes managing your assets simpler. An experienced wealth manager can assist with both consolidated reporting and cash flow modelling.
Getting the timing right on selling your business and securing your financial future is just as important as the figures themselves. Knowing when it is the right time to ‘let go’ and move onto the next stage of your life can be a difficult thing to achieve, but personal finance planning can increase your chances of success. Some entrepreneurs may have a specific age in mind when they think about selling up, while others may just be waiting for a time that feels right. However you choose to decide this, working on financial planning with a wealth manager can assist you with making a more informed decision.
Higher or lower?
Every entrepreneur thinking about their magic number needs to be prepared for the possibility that their business is worth less than they predicted. For the owners of small- and medium-sized businesses, that can be a serious discrepancy. Selling a business is a significant step in life that involves a great deal of emotional turmoil. It can take a long time to conclude and the process can be convoluted, involving endless meetings with advisers and potential buyers. At the same time, you need to continue running your business. Discovering your selling price is much lower than you expected could turn out to be an unwanted shock.
Beyond working out the magic number and finally selling the business, entrepreneurs will always have more to consider when it comes to their wealth. There could be considerable tax implications to selling a business and it is important to be aware of these. Looking at the best ways to structure your wealth so that it works hard for you and your family is a sensible idea, possibly through the use of trusts. Entrepreneurs should also think about how they have organised their investment portfolio and whether this needs to be reviewed. Inheritance tax (IHT) planning may become more urgent and maximising pension and individual savings account (ISA) allowances is always prudent.
At London & Capital, we take pride in helping entrepreneurs to manage their wealth as their business grows and making the process of exiting as seamless as possible. We believe business owners should start planning for their financial future as early as possible and our advisers are on hand to make that happen.
