Financial planning is key to a successful business sale

Selling a business is a significant milestone and can be complex, sometimes daunting, requiring expertise in several areas including legal, business strategy, and finance. The time pressures of a business sale can often take precedence over financial planning. It’s not uncommon for business owners to have spent time working hard and concentrating on the business, neglecting personal finances, writes Charlotte Elgar FPFS, Chartered Financial Planner, STEP Affiliate

With any business succession strategy, establishing a financial plan works towards making sure you succeed at meeting your personal financial goals, whilst protecting your family and your business.

A client I’ve recently started working with explained that he wished he’d created a more robust financial plan before retiring. He’d had a successful career, but as soon as he stopped working, he felt disorientated. Despite paying into pensions and accumulating savings and investments whilst working, he didn’t have a ‘plan’. The same principles apply when planning to sell a business.

If you don’t have a financial plan, more time and effort is required to reach your end goals. Develop a comprehensive plan to help guide your actions and decision making.

Pre-sale preparation

Establish professional relationships

Establish professional relationships to allow time for them to better understand your business, personal goals and objectives. This isn’t just reflected on the financial side, it’s important to work with a team of professionals who can take the time to understand your personal emotions and motivations behind important decisions.

Look for a financial planning firm by speaking to friends or ask other professional connections for a recommendation for a trusted and FCA regulated financial advisor. Some firms will have a ‘ready-made’ team of professionals to encourage a collaborative approach.

Involve your ‘life plan family’

Financial planning meetings should include partners or family members, as financial planning can be more effective when devised as a family plan.

Firstly, this ensures that everyone is engaged and understands the ‘plan’. Secondly, it provides an opportunity for tax allowances to be shared between spouses or civil partners where possible, creating additional tax efficiency. Finally, provision can be made for longevity of family wealth, including future generation planning, as the wider family goals and objectives can be taken into consideration.

Plan early

A robust financial plan takes time to prepare. Financial planning opportunities include taking advantage of annual tax allowances - early planning ensures these are utilised as soon as possible. With some annual tax allowances, such as Individual Savings Accounts (ISAs), it’s a ‘use it or lose it’ scenario. It also takes time to build a trusted relationship, working with your professional connections, knowing that the business and your finances are in safe hands.

Establish your current position

This is key with any planning strategy. Before embarking on any plan, ask yourself what your existing financial arrangements look like? Are they still suitable? Is the charging structure still competitive?

It’s common for business owners to have existing plans in place, such as workplace pensions and life cover.

It’s also easy to forget or sometimes lose details of old pension arrangements and policies. A financial adviser will be able to help you track these down.

The financial plan should start with a good understanding of where you are now, prior to putting anything new in place. No changes should be made to any financial arrangements without seeking proper financial advice.

Identify your goals and objectives

Whilst busy planning for an exit strategy, you may not have had time to think about what happens next. The original plan you had in mind when the business started may no longer be reflective of your circumstances or ambitions.

Whilst there are differences in the process for selling a business to retire versus a sale to reinvest into a new business, the steps and importance of creating a financial plan remain the same.

Cashflow Planning

A significant tool to help plan for any business sale, or any financial plan, providing reassurance for how you will meet your financial goals. Cashflow planning involves looking at personal budgeting; what do you spend now and how this will change when the business is sold? You may not spend as much on commuting to work but you might want to spend more on travel for holidays. With UK life expectancy currently age 78.6* for men and age 82.6* for women, cashflow planning is essential to understand the long-term impact of no longer working, or potentially at a reduced rate. 

Once the business sale is complete, you will benefit from a cash lump sum injection. You may no longer be in receipt of a regular income stream and need to rely on the lump sum and other existing assets to create a tax-efficient income equivalent. A well-prepared cash flow model helps to demonstrate the sustainability of your income, whilst reflecting the impact of the value of your assets throughout your lifetime. This can be tweaked to include various ‘what if’ scenarios throughout your lifetime. For example, “what if” you downsize in ten years’ time? Financial forecasting can also be applied to test the resilience of your financial plan against potential changes to future economic circumstances.

Post-sale

Don’t be hasty, trust your advisers, and review regularly

Whilst your impulses may tell you to invest once the sale is complete, take some time to adjust to your new wealth position. During this time, ensure your funds are set side securely whilst earning a competitive rate of interest.

Don’t be distracted by media articles or the latest TikTok influencer – trust your adviser!

Review your plan on a regular basis to align to your personal circumstances, legislative changes and new opportunities. These reviews should take place at least once a year and reflect your goals and objectives, to remain on track.

Financial Planning Opportunities

There are various tax allowances available which can be utilised within the sale proceeds. Solutions will depend on various factors and investment risk appetite, but include:

• Pension contributions: the current pension allowance (2024/2025) is £60,000, subject to your level of income. Funds can be withdrawn tax efficiently and the value of a pension scheme typically sits outside of your estate for inheritance tax purposes.
• Individual Savings Accounts (ISAs): the current allowance is £20,000 (2024/25) per annum which gives you the ability to build up significant amounts of wealth over a period of time in a tax-free environment which can be used to support a tax free income stream.
• Venture Capital Trusts (VCTs): the scheme is designed to encourage individuals to invest indirectly in a range of unquoted smaller, higher risk trading companies. A VCT offers tax reliefs including 30% income tax relief up to £200,000, tax free dividends and tax free growth.
• Business Relief Investments: where the proceeds of the business are reinvested into business relief qualifying shares within three years of the sale, they will be immediately exempt from Inheritance Tax.
• Family Investment Companies (FICs): for large proceeds, FICs offers control over significant decisions, while handing over the details of managing your wealth to a team of skilled investment experts.

Final word

Having a financial plan in place will strengthen your personal position when it comes to a business sale. It can also alleviate the stress and anxiety associated with completing a sale. Seek professional advice to make informed decisions and optimise your financial outcomes. Engaging professional advisers helps you to successfully navigate towards a solid foundation for the next chapter of life.

MHA has a highly qualified team of wealth planners and tax advisers to provide strategic and forward-thinking advice at every stage of running and selling a business. Contact us to discuss your financial plans.

* source: 2022 Office for National Statistics

Risk warnings & important information

MHA Caves Wealth is authorised and regulated by the Financial Conduct Authority (FCA), Financial Services Register number 143715. This communication is a marketing communication for general information only, and is not intended to be individual investment advice, a recommendation, tax, or legal advice. The views expressed in this article are those of MHA Caves Wealth or its staff and should not be considered as advice or a recommendation to buy, sell or hold a particular investment or product. In particular, the information provided will not address your personal circumstances, objectives, and attitude towards risk.  Therefore, you are recommended to seek professional regulated advice before taking any action. Key Risks: Capital at risk. Past performance is not a guide to future performance. The value of an investment and the income generated from it can go down as well as up, and is not guaranteed, therefore you may not get back the amount originally invested. Investment markets and conditions can change rapidly. Investments should always be considered long term. Venture Capital Trusts (VCTs) are high risk investments and there may be no market for the shares should you wish to dispose of them. You may lose your capital. Business Relief schemes are high risk investments and there may be no market for the shares should you wish to dispose of them. You may lose your capital. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. Don’t invest unless you’re prepared to lose all the money you invest. These are high risk investment(s) and you are unlikely to be protected if something goes wrong This Information represents our understanding of current law and HM Revenue & Customs practice as at June 2024. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

For any queries, or to know more about our financial planning services, please get in touch: mha.co.uk | [email protected] | 01604 621 421