Steve Jordan, above, founding director and chartered financial planner at wealth management firm, Five Wealth, discusses the importance of working out your number before exiting your business
Building a business through your life can be highly rewarding in more ways than one. However, when the time arrives to exit or retire, it’s crucial to have plans in place that ensure you can reap those rewards and fund your life after the sale. The key to successful planning is finding your ‘number’: the amount of money you need to fulfil your future plans and ambitions. Working out your number is an essential but often overlooked step before selling a business, and it makes sense to start considering this as early as possible.
The benefits of knowing your number
Rather than waiting to calculate your number once the sales process has begun, having a good understanding of what that figure might look like from the start can provide a number of benefits:
- Greater realism – You may already have a rough idea of what your business is worth but if you aren’t sure, your corporate finance advisers should be able to provide you with an accurate figure. If your ideal number is higher than your exit value is likely to be, you either need to delay a sale and focus on growing the business further, or potentially reassess your plans and consider what expenses have gone into calculating that number.
- Increased focus – Your number should provide you with a clear objective to work towards, which in turn should help you to make decisions throughout the sales process and your exit strategy.
- Easier decision making – Knowing your number should enable you to evaluate offers and different deal structures more easily, assessing whether they could work for you and your goals.
- Reduced stress – Completing a deal and the accompanying due diligence can be a very stressful process. This doesn’t need to be compounded by not being able to decide on an offer because you don’t know if it gives you what you need. Knowing your number should provide you with clarity and allow you to focus on the other aspects of the process.
- An improved exit plan – The number you need should be the goal and foundation for your entire exit strategy. If you have an idea of what the figure is, you should have a good understanding of the amount of time it will take for the business to reach that value, providing a target to aim towards.
What goes into your number
There are several factors to consider when calculating your number. Some key factors you need to consider include:
- Future ambitions – It’s likely your business has been your top priority for years, but it’s important to consider what you want to do with your life after you sell or retire. You may not want to exit the business fully, or maybe you have other ventures and ideas in mind. After many years of hard work, you might have plans to make some big purchases with the proceeds of the sale to reward yourself, such as a holiday home or a new car. Your future plans, both professional and personal, are key to consider when calculating your number, so that you don’t fall short.
- Lifestyle – In early retirement, it’s common for people’s spending to increase, as they now have more free time and a substantial savings pot to pursue their interests. That’s why it’s crucial to carefully consider the type of lifestyle you want to maintain going forward. At this stage, it’s important not to underestimate your future needs, ensuring that your plans are both realistic and thoroughly detailed.
- Travel – The itch to travel has never been stronger, as distant corners of the world become easier to reach through cheaper plane tickets and new flight routes. This might be something you want to prioritise in your post-exit plans, with many people allocating a sizable holiday fund to cover their travel plans for the next few years.
- Family considerations – You may have dependents that you need to consider when calculating your number, too. Whether you have school fees to pay for younger children, older children you’d like to help with a house deposit, or elderly parents who have care needs, these must all be taken into account. You’ll also need to think about inheritance tax planning and which assets to leave for family members.
What to do if your number is too high
These are numerous considerations that go into your number, but with proper planning and assistance from a professional, you should be able to arrive at a figure specific to you and your goals. If it is less than your business is worth, the sale process should be easier. If you have capital left over after planning, there is also an opportunity for you to put shares in a trust for future generations, which is also best to do before any transaction.
However, if the number is greater than your business’s predicted value, you may need to re-evaluate your future plans. Whether that’s scaling down your travel plans or deciding not to buy that car or holiday home, it’s important to make your number align with what your business is worth.
You may also want to consider delaying your exit to give your business more time to grow. Calculating your number earlier also allows you to plan more effectively, so that you can find the right time to sell and make strategic decisions so that you are prepared when that time arrives.
Enlisting professional help
While it is possible to calculate your exit number on your own, the benefits of working with a financial planner who has specific experience with clients selling businesses are significant. An experienced professional should be able to ask the right questions to tease out the things you may not have considered, providing you with a long-term cash flow model based on your investments and their likely returns.
They should also test out various scenarios so that you are covered for all potential eventualities, as well as providing guidance if the deal develops or changes, quickly amending your planning to ensure the new structure still works for you. By calculating this number early, you’ll be able to focus on the process of building and selling your business, with the comfort of knowing your future is protected.
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