Liz Colfer, director and chartered financial planner at Five Wealth, discusses the role financial advisers play in helping clients determine their ‘number’ – the crucial financial target needed to support their post-business life.
As a business owner, how do you know when you’ve reached your ‘number’? This is the specific amount you’ll need after exiting to have financial comfort going forwards, with the ability to fund your goals and ambitions (and those of your family). It probably goes without saying, but only thinking about this after a sale is likely too late, and the sooner you start this conversation the better.
We’re not talking here about rough estimates, but a carefully planned figure that takes into account personal as well as business objectives and is sufficient enough to weather the challenges thrown at it. This is often overlooked when building towards an exit but is an area where a financial planner can bring both value and clarity into the picture.
Why should we do this?
Having built your business up, approaching the point of sale can be extremely stressful and there will always be multiple work tranches requiring your input at the same time. Knowing what you are working towards, and what life post-sale might look like, can be one of the main things that keeps you going.
Knowing your number as early as possible in your business lifecycle will help with the focus and clarity of the entire business strategy and is the foundation for your exit. It provides a target to aim for, helps with decision making along the way (particularly useful when considering different offers and exit routes) and gives realistic timeframes as to when things may be achievable. If you don’t know your number, how can you possibly expect to make the best decisions?
Once you know your number, corporate finance advisers can help you understand what your business is currently worth and provide realistic expectations, taking into account market conditions.
It could be that if your number is higher than you are able to sell for; there are trade-offs and considerations to work through. One is whether to keep on the growth trajectory and carry on building the business up to your target. Another is whether there is alternative income generating work or projects that you could get stuck into post sale, or if there are planned expenditures in your retirement, you’d be willing to cut down on?
If you find yourself in a position where your number is actually lower than the sale value, you need to think how you will utilise the surplus wealth in line with wider planning needs.
What factors tie into the calculation?
There are many different factors that tie into the number calculation, and it’s easy to see why such a figure is so unique and different for everyone. Just a few of the key things to consider would be:
• Lifestyle expectations – It’s hard to know for certain what your post-exit spending patterns will look like. We often see expenditure in retirement increase given the additional time that people need to fill. People find themselves taking up new hobbies, spending more time socialising or even relocating. The more colour you can give to the dream position, the more helpful this is for your financial planner.
• Travelling – On exit, most people suddenly have time on their hands which opens up the possibility of really getting through that travel bucket list – whether its short regular trips, or longer multi-destination holidays (or both) we often see travel being one of the largest expenditures and for good reason. It’s vital this is factored into your calculations.
• Career ambitions – Your adviser will work with you as you decide whether to continue your working career or if there are other avenues you’d like to explore – do you want nothing more than to never set foot in another board meeting again, or would you like to use your skills and experience in a non-exec role? It may be that you are staying on for a set period to help the new owners, or you may have other ventures you’d like to pursue. The financial side of these decisions, and ultimately their success, will feed into your own calculations and plans.
• Family – It’s likely there are still family members who are financially reliant on you. Post sale, there may be regular outgoings such as school and university fees, help needed with funding for house deposits and weddings, or even elderly relatives with care costs that need to be factored in. The family considerations go beyond this though, and planning for future generations with regards to Inheritance Tax plays a key role. Thinking about your own legacy and what you really want it to look like is key on the sale of your business.
The value of professional guidance
Whilst some may attempt to calculate their number on their own, financial planners bring a level of expertise that goes beyond simple financial forecasting. An experienced professional can ask questions you’d not considered, provide valuable challenge and can bring reassurance that your plans are both stress tested and flexible.
Working alongside other professionals in the space can help in navigating through the complexities of different stages of the business and can adapt planning as and when different factors come into play. More than anything, a great planner will help to take away the worry that can come with the question of ‘do I have enough?.
